Crude oil prices recorded their fifth consecutive week of gains last week.
Alongside rising global bond yields and CDS spreads (widely regarded as a measure of risk), climbing commodity prices further illustrate the market repercussions from the ongoing geopolitical fallout in the Middle East.
Long on the table has been the political and economic blockade of Qatar. Having been rumbling on since June, the stand-off shows no sign of abating, and looks to be exacerbating a Qatari economic slowdown that has long been in motion.
However, as far as the breakdown of diplomatic and economic relationships between Qatar and the rest of the GCC affects markets and economies in the Middle East, the Qatar impasse is just one ingredient in the mix.
Much more significant development for markets is Crown Prince Mohammed bin Salman’s anti-corruption drive in Saudi Arabia, which many believe will consolidate his power over the country.
The arrests of numerous princes, ministers and officials earlier this month appear to only be a taster, with Saudi Arabia’s attorney general describing the detentions as “phase one”.
Thus far, the market impact has been mixed. The Saudi equity market fell by only a modest 0.5 per cent last week. But on the flipside, investors have been building in an extra risk premium into financial assets, with Saudi five-year CDS spreads rising nearly 22 basis points to stand at 103.5 at the current juncture.
But what are the longer term implications for investors and markets in the Middle East?
Providing the anti-corruption actions do not become a long term method of governance, the move bodes well for foreign investors. Significantly, the purge comes at a time when Saudi Arabia is aggressively courting international investors. Top of that list is the flotation of Saudi Aramco, billed as the largest ever initial public offering.
The last few months have seen a jumble of messages from various Saudi sources. Will there be an IPO or a private placement? If it floats, will it be London, New York, or both? Can it pass the numerous legal challenges currently in its path?
A more centralised governance structure creates a more coherent system of guidance for markets and will result in “one voice” coming from the Kingdom.
With speculation rife about whether Aramco will float, any convincing detail before the end of the year will be enthusiastically welcomed. This will help clarify that any delay to the IPO at this stage will reflect the complexity of the deal rather than recent political developments.
The Crown Prince’s consolidation of power should also make it easier for him to push through his reform measures as he increasingly positions himself as the sole arbiter of Saudi policy.
This has the potential to open up vast investment opportunities. It’s also likely we’ll witness a positive effect on economic growth. The destruction of old networks and the endemic “culture of corruption” should provide a boost to internal communities and foreign direct investment.
Neither effects will be limited by Saudi Arabia’s borders. Given the nation’s wealth and influence across the Middle East, developments there are likely to set the tone for the region.
This comes at an increasingly unstable time for the Middle East, with tensions between Saudi Arabia and Iran worsening, and Lebanon and the Yemen caught as pawns in the middle. A stronger power base in Saudi Arabia could extend the Kingdom’s dominance across the region.
The situation is not without risks. Mohammed bin Salman’s accumulation of power could prompt a shift away from consensus-based policymaking, raising the prospect of a backlash from parts of the Saudi establishment that undermines his authority. This raises the risk premium.
However, should the drive against corruption continue in a controlled manner, the latest developments in Saudi Arabia will increase investor confidence over the long term.
After the short term uncertainty abates, a more stable political climate and more candid business practices will encourage business and investment appetite.
What started out as a weekend of zeal against corruption within the state could determine hunger for Saudi Arabia as an investment opportunity in the coming months.