Post-corruption era investment good despite warnings by big bad news story wolves
Go back a few months, and the prophets of doom were predicting that the detentions of last November would deter international investors from putting their money into Saudi Arabia. They — mainly international news organizations keen to be first with a big bad news story — told us that it was all about the rule of law, and transparency, and reliability of legal jurisdictions.
They said that this would hit foreign direct investment (FDI) particularly hard, as overseas investors pondered whether their local partners in the Kingdom would be swept up in an anti-corruption purge. And they predicted it would have a knock-on effect on the Kingdom’s economy and financial markets.
In short, they predicted that it would undo all the positive sentiment that came out of the Future Investment Initiative that took place in the Ritz-Carlton in October, just days before the anti-corruption initiative was launched.
Well, by virtually every meaningful benchmark it just hasn’t happened.
It is still too early to say what the FDI statistics will show; the agencies calculate these quarterly rather than monthly, so we are still waiting for the figures for the final quarter of 2017. The trend for most of last year on FDI was gently rising from a record low in Q1, with a big leap in the third quarter.
It would not be surprising if some FDI decisions were postponed after the anti-corruption shock. Not because global investors like corruption, but because of the uncertainty after such a major event. The real gauge of the effect on FDI will be after we see the figures for the first quarter of 2018.
The private sector corporations that drive FDI are by their very nature involved on a direct level with their Saudi partners, and you might expect them to pause, even when those partners were not directly implicated in the corruption process.
There is anecdotal evidence that some businessmen have put investment decisions off, but so far nobody has come out and said they would not do business with Saudi Arabia in the post-corruption era. Perhaps they are having to re-calculate and remove the bribe premium they would have paid before?
But FDI figures are not the only measure of global investor sentiment. Global institutional investors, by contrast, make their decisions at arm’s length, based on cold hard financial and macro-economic fundamentals, and from these big players the view is virtually unanimous: It is business as usual.
The country’s financial policymakers are in the process of launching another big sovereign bond, perhaps rivaling the record-breaking $17.5 billion one raised in 2016. When that is done we will see what international debt market’s appetite is for Saudi debt. It would be a big surprise if any of the banks bidding for a slice of that action would pull out, citing concerns about due process.
Western banks are bulking up their Saudi businesses with top level hires, the accounting and consulting firms are all putting more boots on the ground in Riyadh.
Likewise, equity investors — admittedly comprised overwhelmingly of local institutions and individuals — do not appear concerned about the anti-corruption aftermath. Quite the opposite. The Tadawul is trading at its highest levels sine late 2015, and that can only get better once foreign investors come into the market with the upgrade by MSCI and other index compilers, expected in the summer.
All this is against an economic backdrop that is looking more benign than for some years. The IMF raised its GDP forecast to 1.6 percent back in January, the government said it will be 2.7 percent. Expect somewhere in the middle, but wherever, it represents an end to the recent recessionary trend.
The other way of assessing sentiment in post-corruption Saudi Arabia is through the opinions and actions of bankers and other financial professionals who do business there, and again, nobody seems to have been put off by the events of last November.
Western banks are bulking up their Saudi businesses with top level hires, the accounting and consulting firms are all putting more boots on the ground in Riyadh. The financial PR firms are swarming like sharks around the growing business there. Surely, if anybody had qualms about due process and the rule of law, it would be the spin doctors?
I’ve long suspected that, although the global financial profession might pay lip service to governance and regulatory issues in emerging markets, what they are really concerned about is the level of return they get from them.
In the long run, the anti-corruption campaign can only benefit the bottom line.
- Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai
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