Swiss investment bank UBS says Saudi Arabian economy is stabilising

UBS says kingdom taking steps to cutting expenses, diversifying economy

The Tadawul is up 10 per cent so far this year. Simon Dawson / Bloomberg

The Swiss investment bank UBS said that Saudi Arabia's economy appears to be stabilising ahead of its possible inclusion in the MSCI Emerging Markets stock index even amid volatile oil prices and regional conflicts.

Economists at UBS are predicting that GDP growth for the country's economy will stabilise at about 1 per cent this year and that its currency, which is pegged to the US dollar, will remain unchanged at 3.75 Saudi Arabian riyals over the next 12 months.

“Despite the geopolitical situation, we expect the Kingdom’s economic growth to stabilise and its deficits to shrink,” said Ali Janoudi, head of wealth management for Central & Eastern Europe, Middle East and Africa at UBS and vice chairman of UBS Saudi Arabia.

"Its consolidated fiscal position is a result of measured steps toward cutting expenditures and reducing oil dependence. Economic diversification will likely increase non-oil revenues and private-sector participation, and should benefit sectors like tourism, financials, mining, logistics, and healthcare. UBS will continue to support the kingdom’s growth with its investment banking, asset and wealth management capabilities both globally and through UBS Saudi Arabia.”

The index compiler MSCI said in June that it had added Saudi Arabia to its watchlist for possible addition to its emerging markets measure of stocks after the kingdom fulfilled a number of pending requirements including bringing settlement in line with leading international stock exchanges.

The decision by MSCI – which has been widely expected – does not, however, mean that Saudi Arabian stocks will immediately join the MSCI Emerging Markets stock index, a gauge that tracks more than 800 stocks in 23 developing nations, and it is likely to take up to two more years before Riyadh-listed equities officially join the index, as is typically the process with any upgrade.

Regional investors said at the time that they expect that investors who track indexes, typically known as passive investors because they do not pick stocks, will buy between US$10 billion and $12bn of Saudi equities as a result of the upgrade, while investors that pick stocks, called active investors, will invest a further $30bn to $35bn.

The upgrade is expected to be announced in mid-2018, while implementation will follow in mid-2019. Equities in the kingdom are expected to rally ahead of the formal inclusion, if history is anything to go by. The move is also expected to give a boost to stocks region-wide.