Saudi Arabia shouldn't be tarred with the same brush as other emerging markets, analyst says

  • A recovery in global oil prices — now around the $80 per barrel mark — is helping Saudi Arabia and its surrounding oil exporters to recover from an economic crisis amid a slump in prices in 2015.
  • Saudi Arabia is the biggest oil producer in the Middle East and the region's de facto lynchpin.
  • Not all the economic reforms are popular with the public, but they are part of a larger program of economic and social reforms, known as Vision 2030, being spearheaded by Crown Prince Mohammed bin Salman.

Saudi Arabia has achieved official "emerging market" (EM) status in terms of financial markets, but it's not facing the same problems as other EMs, an analyst told CNBC on Tuesday.

The country shouldn't dismissed by investors wary of EMs amid rising U.S. interest rates and trade war concerns, Fadi Arbid, founding partner and CIO at Amwal Capital Partners, an independent investment firm in the Middle East and North Africa (MENA) region, said.

"We can't isolate ourselves from the emerging market crisis," he said. "Saudi has been one of the best performing markets, but people stopped putting money in EM and Saudi has been tainted with the same brush as all EM — despite Saudi having completely different dynamics or maybe even opposing dynamics thane (other) EM."

Saudi Arabia's Mohammed bin Salman (2nd L) on April 19, 2017 in Riyadh, Saudi Arabia.
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Saudi Arabia's Mohammed bin Salman (2nd L) on April 19, 2017 in Riyadh, Saudi Arabia.

A recovery in global oil prices — now around the $80 per barrel mark — is helping Saudi Arabia and its surrounding oil exporters to recover from an economic crisis amid a slump in prices in 2015.

"Oil prices are high and that's a blessing for Saudi but a curse for other oil-importing EM. The currency is pegged (to the dollar), that's also not the case with other EM markets that have a crisis, such as Argentina or Turkey, and the third thing is that Saudi is not affected by these trade wars," Arbid told CNBC's "Capital Connection."

"Interest rate hikes do not affect Saudi, whereas it affects all other EM markets which have U.S.-denominated debt and need to print more money, creating more inflation and having to increase interest rates and so on to protect their currencies."

Middle East lynchpin

Saudi Arabia is the biggest oil producer in the Middle East and the region's de facto lynchpin. The oil price slump prompted budget deficits to balloon among big-spending governments like Saudi Arabia. Since then, however, it has introduced fiscal reforms to reduce its deficit, such as the introduction of VAT earlier this year and the cutting of costly energy subsidies.

The measures might not be popular with the public, but they are part of a larger program of economic and social reforms, known as Vision 2030, being spearheaded by Crown Prince Mohammed bin Salman.

Saudi Arabia's growth reading for the second quarter is due later Tuesday. It remains to be seen whether the kingdom's economy will continue a recovery seen in the first quarter, when gross domestic product (GDP), adjusted from inflation, grew 1.2 percent from a year earlier. For 2017 as a whole, its GDP shrank 0.7 percent.

Saudi's economic recovery has not gone unnoticed. Arbid noted that the Tadawul, Saudi's stock exchange, had seen $3 billion worth of capital inflows since the start of the year, with investors keen to get involved ahead of the country's forthcoming inclusion on the MSCI Emerging Markets Index from June 2019.

Inclusion on the index and an official classification as an emerging market is a boon for the country as it seeks to attract foreign investment.

"If you look at the last 12 months, a lot of things have happened in Saudi. We have an MSCI inclusion from a market perspective, we have a lot of social changes, we have the movie industry, cinema industry, we have women driving so I think, taking in all that, the changes we've seen in Saudi over the last 12 months have been immense," Arbid said.

Financial markets have been roiled in recent months with an escalating trade spat between China and the U.S. seeing mutual tariffs levied on each other's imports. On Tuesday, markets in the Middle East were again trading lower as Sino-U.S. tensions weighed on sentiment. Saudi Arabia's Tadawul All Share Index (TASI) has also had a rocky few months, but is still up 7.5 percent since the start of the year.

Eyes on Aramco

One of the big questions global investors are focused on when it comes to Saudi Arabia is when, and whether at all, it will take its national oil company, Saudi Aramco, private.

The idea to privatize the company came in early 2015, a time when global oil prices had hit a historic low of around $26 a barrel. Now, global oil prices are around $80 a barrel, somewhat disincentivizing the privatization.

Speculation and possible dates of an initial public offering (IPO), when the company will be listed on a stock exchange (both in Saudi and abroad), have come and gone, leading many to wonder whether the listing will happen at all.

On Monday, Saudi Aramco's CEO Amin Nasser told CNBC he could not say whether the oil giant would make its long-anticipated stock market debut by 2020.

Arbid agreed that the possible date of Saudi Aramco's IPO "does seem to be in limbo," but said there are good reasons to delay the launch.

"If you look at things that have happened since that announcement (of an IPO)… oil prices today are in the eighties (of dollars per barrel) whereas a few years ago it was almost $30 oil, $25 oil — and now we're in the eighties. So, you have this changing oil price which is extremely important for the Aramco IPO and the longer you wait the better off you are as you'll have anchored $75-$80 oil."

Arbid said Saudi Arabia's recent inclusion on to the MSCI is also a big event for Aramco. "MSCI is a 2019 event and you would want Aramco (IPO) to happen after MSCI because that would create a lot of (capital) flows into Aramco and into Saudi." As such, he believed the delay to the Saudi Aramco sale could be perceived as a good thing.