Saudi Arabia attracts potential investors

Saudi Arabia sold $7.5 billion of international bonds in the first test of how much damage the brutal killing of Washington Post columnist Jamal Khashoggi has inflicted on foreign investor confidence in the oil-rich kingdom.

Background

Jamal Khashoggi was one of the Arab world’s most prominent journalists and commentators. He had been living in self-imposed exile in the United States for the past year. Mr. Khashoggi was part of the Saudi elite, close to members of the royal family, and former adviser to a Saudi intelligence chief who became ambassador to Britain and America. Khashoggi was a critic of the crown prince, Muhammad bin Salman, or MBS. MBS has been known for reforms - he has pushed to make Saudi Arabia appear more “stable and progressive” to draw investors into the Saudi tech industry. He has plans to reorient the Saudi economy away from oil and towards technology, but also has a reputation for silencing critics and dissidents.

Khashoggi authored a regular column for the Washington Post and was in the inner circle of countless diplomats and journalists, and used his influence to criticise growing repression in Saudi Arabia and to urge an end to the war in Yemen. On 2 October, he disappeared while in the Saudi Arabian Consulate in Istanbul. Subsequently, it has been revealed that he was killed.

The murder of Khashoggi opened a can of worm for Saudi Arabia, with many important foreign investors boycotting the “Davos in the Desert” conference and withdrawing investments.

Analysis

Only three months have passed since global investors — along with some of the banks managing the deal — skipped a major economic forum in Riyadh amid broad condemnation over the murder, which some blame on Crown Prince Mohammed bin Salman. While early indications showed the kingdom would have to pay up, the premium narrowed substantially as the days went by.

“Saudi is not sanctioned, so I guess in the end for investors it’s a question of price, set against perceived risks,” said Tim Ash, a London-based strategist at BlueBay Asset Management LLC.

Reeling from the slump in oil prices, the kingdom has been relying on global bond investors to help finance its budget deficit, raising $52 billion in sales since a 2016 debt debut. The initial outcry over Khashoggi’s murder appeared at first as though it would stifle foreign investment into the country. The U.S. and Germany even said they’d rethink their arms sales.

Since BNP Paribas SA, Citigroup Inc., HSBC Holdings Plc, JPMorgan Chase & Co. and NCB Capital Co. started marketing the bonds, investors said it’s more a matter of price than politics. While the offering was the kingdom’s smallest conventional one yet, it was still big, attracting $27.5 billion in bids. “It was small by Saudi standards but big by last year’s market absorption capacity,” said Delphine Arrighi, a London-based emerging-market fund manager at Merian Global Investors.

One $4 billion tranche, due in 2029, priced at 175 basis points over U.S. Treasuries, down from initial guidance of about 200 basis points. The other, a $3.5 billion sale of 31-year debt, saw pricing narrow to 230 basis points from around 250 basis points. That’s still about 25 basis points over Saudi Arabia’s existing curve, which could be a sign that the Kingdom was eager to ensure it attracted demand.

The bond sale, the same day that Turkey also offered sovereign debt, comes amid renewed appetite for riskier assets on speculation that the U.S. Federal Reserve will pause interest-rate increases this year. It also comes weeks before JPMorgan begins including bonds from Saudi Arabia in its emerging-market bond indexes.

The Kingdom’s bonds took a beating after Khashoggi, a Saudi exile who wrote critically about Prince Mohammed’s regime, was killed at the nation’s consulate in Istanbul in October. The murder and the slump in oil, into a bear market in the fourth quarter battered Saudi Arabia’s securities, making them among the worst performers in the Gulf Cooperation Council.

Finance Minister Mohammed Al-Jadaan said last month that the nation intends to sell about 120 billion riyals ($32 billion) of local and foreign-currency debt this year to help finance its deficit. Last week, 11 suspects were put on trial for Khashoggi’s alleged murder, with the government denying Prince Mohammed’s involvement.

Assessment

Our assessment is that Saudi Arabia’s decision to send all five suspects in the murder to trial has marginally improved its image among international investors. We believe that the Khashoggi murder had the potential to be devastating to the sensitive, oil-dependent Saudi Economy and therefore, Riyadh has done enough to protect its economy from international backlash.