November 22, 2018 / 4:27 PM / 17 days ago

Breakingviews - Saudi stock market’s “MbS discount” to get worse 

U.S. President Donald Trump shakes hands with Saudi Arabia's Crown Prince Mohammed bin Salman in the Oval Office at the White House in Washington, U.S. March 20, 2018. REUTERS/Jonathan Ernst

LONDON (Reuters Breakingviews) - Call it the MbS discount. Since Jamal Khashoggi’s brutal murder by Saudi Arabian agents in early October, equity and bond prices in Riyadh have slumped. U.S. President Donald Trump’s indifference to Crown Prince Mohammed bin Salman’s alleged role in the journalist’s murder may offer a temporary lift for the Saudi market. But too many other problems lie in wait.

The selloff is tangible. Foreign investor exposure to shares on the Saudi Tadawul exchange fell almost a quarter in October from the previous month. The Tadawul All Share Index is 5 percent below its October high. Meantime, the cost of insuring Saudi senior debt for five years has jumped over 20 basis points since October 5 while that of regional rival Qatar has barely budged. And the spread of a Saudi Eurobond maturing in 2028 over U.S. Treasuries has spiked up over 35 basis points to 144 basis points, near 10-year highs, Refinitiv data shows.

Despite recent lurches in emerging markets and oil prices, a good chunk of this looks Khashoggi-related. In the short term, the bond market worries complicate efforts to finance oil giant Aramco’s$70 billion purchase of chemicals group SABIC. Attempting a bond that large right now might require Aramco to pay a coupon more in line with a high-yield issuer.  

Achieving emerging market status in the MSCI and other indices means up to $70 billion of global money could still flow into Riyadh next year, assuming the Khashoggi incident doesn’t compel investors wary of violating so-called ESG concerns to carve the kingdom out of their portfolios. Trump clearly has MbS’s back. Even though the CIA had linked the crown prince to the murder, on Nov. 20 the president wavered that he “maybe had and maybe hadn’t” been involved.

Yet Trump isn’t the only U.S. constituency. A two-thirds vote in Congress could bring sanctions at any time. More troubling for MbS, some Saudi royals are agitating to prevent him becoming king, Reuters reported on November 19. If true, that could provoke more erratic behaviour from the 33-year-old prince. It certainly puts an asterisk over his accession, and with it his vision to transform the economy away from hydrocarbons. That alone merits a bigger MbS discount.

Breakingviews

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