For a moment, Wall Street seemed to be inching away from Saudi Arabia. Now, it’s already inching back.
A month after the murder of government critic Jamal Khashoggi in the Saudi consulate in Istanbul, bankers say the rewards of doing business with the oil-rich kingdom far outweigh the risks.
While the Khashoggi affair has dented the image of reformer and modernizer cultivated by 33-year-old Crown Prince Mohammed bin Salman, there is simply too much money at stake.
Jamie Dimon of JPMorgan Chase & Co. says his skipping of a glitzy investment conference chaired by the crown prince two weeks ago in the immediate aftermath of the killing accomplished nothing. Doing business with Saudi Arabia was “not something I’m ashamed of,” Larry Fink, head of BlackRock Inc., told a conference in New York Thursday. He spoke a day after Turkey’s top prosecutor said Saudi agents strangled Khashoggi just after he entered the consulate and then dismembered his body.
The financial fallout will probably come in the form of slightly higher borrowing costs, since the crown prince has become something of a wild card to the bankers hired to finance his ambitions.
In Saudi Arabia, politics has rarely figured into the calculus
Until now, there was “almost no pricing of the political risk in the kingdom,” said Ayham Kamal, head of Middle East and North Africa at Eurasia Group. “The most recent events have shifted investor opinion.”
A few basis points represent mainly an inconvenience. Saudi Aramco, the state oil company, had $33.8 billion in profit in the first half of 2017 and was virtually debt free. The crown prince’s acquisitions in recent years include a $300 million chateau in France, a $500 million yacht and a $450 million Leonardo da Vinci painting, according to the New York Times. Even at the peak of the Khashoggi crisis, the yield on 10-year Saudi debt rose about 50 basis points; it’s now at about 4.44 percent, compared to an average this year of about 4.2 percent.
The costs will emerge in coming months when talks begin over a $50 billion credit package for Aramco to buy a controlling stake in the country’s largest chemicals company. More expensive credit for the giant financing would mark a contrast to the past two years. Saudi Arabia has attracted bankers’ money, time and attention with little regard for political risk—even after the crown prince sought to isolate neighboring Qatar and locked up scores of royal cousins, officials and businessmen for months in the Ritz-Carlton hotel in what was labeled an anti-corruption crackdown.
Three bankers who currently do business with the Saudis and who attended the forum last month said that exiting the country’s market was out of the question. But they had little doubt lenders would demand better terms. Even senior Saudi officials who asked not to be named citing the sensitivity of the matter said they expected their cost of funds to rise.
Spokesmen for Saudi Arabia’s Finance Ministry and Saudi Aramco didn’t respond to requests for comment.
While Saudi markets have stabilized, the killing of Khashoggi has muffled the story Saudi Arabia and its supporters have been telling —one of a modernizing regional power. The crown prince in 2016 unveiled a blueprint to diversify away from oil. An envisioned megacity on the Red Sea called Neom would be backed by more than $500 billion in investments. At the inaugural Future Investment Initiative last year, he was joined on stage by Blackstone Group Chief Executive Officer Stephen Schwarzman and SoftBank Group Corp. founder Masayoshi Son, both of whom showered the young ruler with praise and walked away with $65 billion of the kingdom’s investments between them. Neither attended this year.
Bankers who were there typically avoided mention of the crown prince by name even in private conversations. But they generally had the same strategy: hoping the world’s attention quickly passes while nurturing relationships after their bosses skipped the gathering in Riyadh, according to at least 10 bankers at this year’s conference.
This year alone the Saudi government and its sovereign wealth fund, known as the Public Investment Fund, borrowed a total of $27 billion from banks including JPMorgan, HSBC Holdings Plc, Morgan Stanley and Citigroup Inc. The deals were priced at 75 basis points above London Interbank Offered Rate; that’s down from 103 basis points in 2016.
Leaders in Washington and Jerusalem who share the Saudis’ antipathy to Iran signaled they were ready to overlook the crime that the government in Riyadh says was committed by rogue agents. (In the latest grisly Turkish account of the killing, an adviser to President Recep Tayyip Erdogan said Friday Khashoggi’s body was dismembered in order to be easily dissolved.) “What happened in the Istanbul consulate was horrendous,” Israeli Prime Minister Benjamin Netanyahu told reporters. “At the same time, it is very important for the stability of the world, for the region and for the world, that Saudi Arabia remain stable.”
The politics aren’t the only disruption for western bankers in the kingdom. Many spent the past two years jostling for a piece of the promised sale of shares in Aramco, potentially the largest initial public offering ever.
With the IPO now shelved, Saudi Aramco is preparing to acquire a 70 percent stake in Saudi Basic Industries Corp. for about $70 billion. It’s going to borrow most of those funds through a mixture of loans and bond sales.
“This has definitely increased the risk premium that we demand out of the kingdom,” said Rishabh Tiwari, a portfolio manager at Swiss Life in Zurich, which had 223.6 billion Swiss francs ($222 billion) at the end of 2017 and holds some Saudi corporate notes. “The [Aramco-Sabic] deal will definitely be harder relative to a few months ago; it will be harder to do the deal at the same pricing level.”
In Saudi Arabia, politics has rarely figured into the calculus. Until now, it’s been about oil prices. When it first tapped bond markets in 2016, oil was under $50 a barrel and the budget deficit was over $80 billion. Oil is now trading above $65 and the deficit is shrinking.
“If you’re looking at reasons to buy or sell Saudi bonds, the number one factor is the oil price,” said Paul McNamara, a fund manager at GAM Ltd. in London. “I hesitate to say there is a Khashoggi factor in the way Saudi bonds are trading. The oil price is overwhelmingly more important than anything else.”
Bankers stress that the economic fundamentals for Saudi Arabia have not changed. And they’re optimistic it will be back to business as usual by the time fundraising for the Aramco-Sabic deal starts next year.
“The broader appeal in the economy and the transition plan has taken a hit,” said Eurasia’s Kamal. Eventually, though, “some western businesses will resume their normal activity with the kingdom and Wall Street will keep on knocking on Riyadh’s door for business.”