12:08 PM 30 November 2017



Impact of Saudi Arrests on Investor Sentiment

One week after Saudi Arabia hosted a conference at the Ritz Carlton that attracted some of the world’s most established investors, several dozen elites - most prominent among them, Prince Alwaleed bin Talal - were arrested as part of the kingdom’s sweeping anti-corruption operation. Prince Alwaleed’s arrest shocked Saudi's business circles as well as his partners in the West. These actions have shaken investor confidence and made businesses wary of accepting Saudi investments. How can we reconcile Crown Prince Muhammad bin Salman’s anti-corruption operations against figures such as Prince Alwaleed with his aim of courting foreign investments, as well as his ambition of installing a “moderate” kingdom? We spoke to MEI's Director Professor Engseng Ho and he had this to say:


"A lot has been said about politics and power in the wake of the arrests. There has been less commentary on the business angle. Those by and large have focused on transparency and the rule of law. A recent piece by Andrew Ross Sorkin in the New York Times (NYT) highlighted the case of Prince Alwaleed bin Talal, the superstar Saudi investor who has bailed out the likes of Citibank and Euro Disney, partnered with Bill Gates to privatize the Four Seasons Hotel chain, and made immense profits in the deals. Saudi Arabia's own Warren Buffett, he's been called. Alwaleed's arrest raises the issue of transparency, and will spook foreign investors since he is so well known to them, the NYT argues. But if you look just a bit deeper into the matter, it is curious that his partners in the world of global high finance have not been terribly vocal in speaking out for.

Why is that so?

Transparency is the banner of those charged with protecing the interests of the public, such as the Securities and Exchange Commission in the US, which looks out for the citizen investor in publicly listed companies. These are the sparrows. But the world Alwaleed inhabits goes beyond the stock exchange, and includes private equity, hedge funds, sovereign wealth, and indeed privy purse. These are the hawks. This is not a world of transparency, public information, standard indexes and average yields. Rather, it is one where confidentiality, private information, and deep pockets on short order outcompete the retail investor, and garner superprofits. In the context of the extended boom of the past decade, with low yields and a frothy US stock market, the most savvy investors are not looking for transparency. They are looking for access and opportunity. Privileged information is their niche. These are to be found not in the public domain of transparency, but the private and sovereign ones of confidentiality. Think of it like oil production, where smart new shale players in the US have done well digging in the hidden cracks between rocks when the big, known pools of oil have been depleted. Alwaleed, like his colleagues Buffet and Gates, have done well arbitraging between public and private information and wealth. Public companies in death throes like Citibank are revived with private or privy purse wealth. Others are taken private and stripped of assets or overhauled. Venture startups with valuations boosted by private and sovereign funds are taken public in IPOs. This is where the big deals are made. Retail investors, mostly bystanders here, are always intrigued by the gossip surrounding them, and eager for a piece of the cake when IPOs are finally offered. But this is after the first bites have been taken by first movers with privileged information.

Political events that restructure markets always throw up losers and winners. The Saudi arrests signal precisely this: that yes, there are losers, but in the same measure, there will be new winners. A whole generation of domestic brokers who increased the cost of government contracts and lowered the returns of foreign investors will now be bypassed. Foreign investors can go straight to the Saudi Public Investment Fund (PIF), which is being expanded as a sovereign wealth fund taking direct equity stakes in businesses at home and abroad. Existing assets, such as oil wealth, will be made liquid and mobilized into a more dynamic and diversified investment pool by proven operational companies such as Saudi Aramco. Think Singapore's Temasek. Foreign startups as well stand to win from the Saudi restructuring. Deals are to be had in both directions, and the most hawkish players have already swooped in. Uber won US$3.5B in equity stakes from the Saudi PIF in June 2017, in the midst of scandals surrounding its founder Travis Kalanick. Masayoshi Son of SoftBank won US$45B of investments for his US$100B Vision Fund, also from the PIF, in a 45-minute meeting with Saudi Crown Prince Muhammad bin Salman (MBS) -- a billion a minute, he boasted on Bloomberg TV in October. These are the sorts and scales of deals Prince Alwaleed is famous for. In his own time, he was known for chasing contracts from uncles, and is said to have been bailed out from home when caught short on his big plays abroad. While negotiations currently underway between him and government investigators are not transparent, it would not be a complete surprise to see him return to high finance at a markdown in assets after putative debt repayments.

Of course with the arrests, investments are down in-country due to fear and uncertainty, and there will be knock-on effects on business activity in the next year or two.  The music has stopped for now in the musical chairs, and there will certainly be losers left without seats. But there are others betting that it will start up again, hoping to be the winners in the next round. These may well include some of those currently under arrest and their international partners. But overall, the message is that there will be room for new winners. And that has many in global high finance listening rather than speaking".


We also spoke to our Senior Research Fellow, Mattia Tomba, who observed that "With the anti-corruption purge, questions over Saudi Arabia’s attitude to business under Prince Mohammed bin Salman’s regime are being raised. The fundamentals of the economy and business do not change. Low energy prices have a negative impact on the economy. The Prince’s commitment to Vision 2030, making the non-oil private sector the new driver of Saudi Arabia’s economy, still remains. However, the uncertainty lies in investors being unable to understand or predict Saudi’s political behaviour which poses a new political risk. Market participants are likely to price a risk premium until there is more clarity."



The Jerusalem Question

Just six months after signing a waiver to keep the American embassy in Tel Aviv, President Donald Trump rekindled the issue, vowing to now shift US representation to Jerusalem and declare the city Israel's capital. Such a development could only bode ill for the Israel-Palestine peace process, as we learnt from Senior Research Fellow Victor Kattan. In a published piece for the Straits Times early this year, Dr Kattan cautioned against such a move: “Moving the US Embassy to Jerusalem would alienate key US allies. The kingdoms of Jordan, Morocco and Saudi Arabia, for instance, all claim to be custodians of Muslim holy places in Jerusalem. They would not take kindly to the US moving its embassy to Jerusalem unless this was also reciprocated by establishing an embassy to Palestine in the same city.”



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