Saudi stocks recovered after a disastrous opening on Tuesday as investors digested details of the government’s landmark budget.
On Monday, the budget set deep cuts in capital spending for next year and reduced utility subsidies in an effort to deal with shrinking oil revenues.
The benchmark Tadawul All Share Index in Riyadh sank by nearly 5 per cent before recouping most of the losses to end 0.8 per cent lower at 6,930.60.
Around the region there was a similarly mixed reaction.
Both the main indexes in Dubai and Abu Dhabi posted small gains, with the Dubai Financial Market General Index closing up 0.4 per cent at 3,134.82 and the Abu Dhabi Securities Exchange General Index rising 1 per cent at 4,296.16.
Meanwhile, Bahrain and Kuwait indexes lost ground.
The Saudi budget had been well flagged but the cuts in energy subsidies were more unexpected.
The Saudi government said it planned to cut spending next year by 20 billion riyals (Dh19.58bn) to 840bn riyals, which would bring the deficit down to 326bn riyals from 367bn riyals this year.
With a slowing economy that would still mean the deficit would rise to 16 per cent of GDP from 15 per cent this year, although it would remain well below the IMF’s forecast of a 21 per cent budget shortfall.
While individual companies are seen as likely losers from the budget, the actions taken are widely seen as necessary to deal with the 70 per cent plunge since last year in the price of oil, which directly accounts for more than 70 per cent of Saudi government revenue.
“Overall, it is positive for the economy,” Nishit Lakhotia, the head of research at Securities & Investment Company in Bahrain, said of the budget cuts. “It shows they are controlling expenditures and reducing subsidies – that is, they are doing the structural reforms that everyone has been recommending given the prospect that oil prices are not likely to return to the levels we’ve seen between 2010 and 2014.”
The “landmark budget” signifies a positive change of direction for the Saudi government, according to Jean-Michel Saliba, regional economist at Bank of America Merrill Lynch.
“It likely marks the end of material overspending practices,” Mr Saliba says. Also, “it starts to introduce a credible medium-term fiscal consolidation strategy to address the oil price slump through revenue and expenditure measures, the first round of which saw sweeping energy, water and electricity administered price changes”.
The budget also underscored the Saudi government’s commitment to its energy and foreign exchange policy, he said.
Forward riyal/US dollar contracts had been rising sharply for weeks, despite assurances in September from the Saudi central bank chief, Fahad Al Mubarak, that the kingdom would not abandon the three-decades-old riyal-dollar peg.
The pressure on the riyal could be a harbinger of inflation, among other worries for the Saudi Arabian economy
But having jumped 250 points early on Tuesday to reach an eight-year high of 725 points, the forward riyal/dollar contract fell back to 620 late in the day as the government’s commitment to policy regained some credibility with traders.
Among the biggest losers on the day was Saudi Basic Industries Corporation (Sabic), the country's dominant petrochemicals producer and one of the biggest in the world.
Sabic shares, which are the largest component in the Tadawul index at more than 7 per cent, ended down 4.5 per cent at 78.03 riyals.
Also posting losses was Saudi Electricity, down 5.7 per cent at 15.74 riyals, following a statement from the company making it clear that any gains it would make from the cut in energy subsidies would be offset by rising costs.
“It’s a double whammy for these companies,” said Mr Lakhotia.
“The petchem companies’ feedstock prices are definitely going up, also for gas-intensive industries. So, at one end they are having to face declining product prices at which they can sell, and at the other end their costs are going to increase. Profitability is going to get hit and there is more room for downside” in the share prices.
Big energy users, such as makers of cement, also reflect this squeeze. For example, Yanbu Cement was one of the day’s biggest losers, dropping 3.3 per cent to 43.74 riyals.
The budget squeeze had been largely factored into markets as the oil price slump set in.
The Tadawul has dropped from above 11,100 at the end of last year to a four-year low of 6,686.27 reached earlier this month.
amcauley@thenational.ae
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MATCH INFO
Uefa Champions League, last-16 second leg
Paris Saint-Germain (1) v Borussia Dortmund (2)
Kick-off: Midnight, Thursday, March 12
Stadium: Parc des Princes
Live: On beIN Sports HD
Company Profile
Name: Direct Debit System
Started: Sept 2017
Based: UAE with a subsidiary in the UK
Industry: FinTech
Funding: Undisclosed
Investors: Elaine Jones
Number of employees: 8
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Afghanistan fixtures
- v Australia, today
- v Sri Lanka, Tuesday
- v New Zealand, Saturday,
- v South Africa, June 15
- v England, June 18
- v India, June 22
- v Bangladesh, June 24
- v Pakistan, June 29
- v West Indies, July 4
Company Profile
Company name: Cargoz
Date started: January 2022
Founders: Premlal Pullisserry and Lijo Antony
Based: Dubai
Number of staff: 30
Investment stage: Seed
ELECTION RESULTS
Macron’s Ensemble group won 245 seats.
The second-largest group in parliament is Nupes, a leftist coalition led by Jean-Luc Melenchon, which gets 131 lawmakers.
The far-right National Rally fared much better than expected with 89 seats.
The centre-right Republicans and their allies took 61.
AS IT STANDS IN POOL A
1. Japan - Played 3, Won 3, Points 14
2. Ireland - Played 3, Won 2, Lost 1, Points 11
3. Scotland - Played 2, Won 1, Lost 1, Points 5
Remaining fixtures
Scotland v Russia – Wednesday, 11.15am
Ireland v Samoa – Saturday, 2.45pm
Japan v Scotland – Sunday, 2.45pm
