Looking at the wealth of Saudi Arabia, Wall Street resumes its activities as usual

DUBAI: For a moment, Wall Street seemed to be moving away from Saudi Arabia.

A month after the badbadination of government critic Jamal Khashoggi in the Saudi consulate in Istanbul, bankers say the benefits of doing business with this oil-rich kingdom far outweigh the risks.

The Khashoggi case has tarnished the image of reformer and modernizer cultivated by Crown Prince Mohammed Bin Salman, 33, there is simply too much money involved.

Jamie Dimon, of JPMorgan Chase & Co., says he ignored a lavish investment conference chaired by the crown prince two weeks ago immediately after the murder gave no results. Doing business with Saudi Arabia was not something I'm ashamed of, said Larry Fink, director of BlackRock Inc., at a conference in New York on Thursday. He spoke one day after Turkey's top prosecutor said Saudi agents had strangled Khashoggi just after he entered the consulate, then dismembered his body.

The financial fallout will likely be felt in the form of slightly higher borrowing costs, the crown prince having become something of a ghost card to hired bankers to fund his ambitions.

In Saudi Arabia, politics rarely figured in the calculation

Until now, there was "virtually no political risk pricing in the kingdom," Ayham said. Kamal, head of the Middle East and North Africa at Eurasia Group. "The latest events have changed the opinion of investors."

Some basic points are mainly a disadvantage. Saudi Aramco, the state-owned oil company, made a profit of 33.8 billion US dollars in the first half of 2017 and was virtually debt-free. The crown prince's acquisitions in recent years include a $ 300 million castle in France, a $ 500 million yacht and a $ 450 million Leonardo da Vinci painting, according to the New York Times. Even at the height of the Khashoggi crisis, the yield on 10-year Saudi debt rose by about 50 basis points; it now stands at around 4.44%, compared to an average of 4.2% this year.

Costs will be felt over the next few months when negotiations of a US $ 50 billion credit allowing Aramco to acquire a majority stake in the country's largest chemical will be incurred. business. A more expensive credit for the funding giant would be in stark contrast to the last two years. Saudi Arabia has attracted money, time and attention from the bankers without worrying about political risk – even after the crown prince sought to isolate neighboring Qatar and locked up dozens of royal cousins, officials and Businessmen for months in the Ritz-Carlton hotel. qualified as anti-corruption repression.

Three bankers who are currently doing business with the Saudis and who attended the forum last month said it was out of the question to get out of the country's market. But they had little doubt that lenders would demand better terms. Even senior Saudi officials who asked not to be named, citing the delicate nature of the case, said they expect an increase in the cost of their funds.

Spokespersons for the Saudi Ministry of Finance and Saudi Aramco did not respond to requests for comment.

As Saudi markets stabilized, the badbadination of Khashoggi stifled the story that was told by Saudi Arabia and its supporters – one of the modernizing regional powers. The Crown Prince in 2016 unveiled a project to diversify oil. A megapolis planned on the Red Sea, Neom, would be supported by investments of more than 500 billion dollars. Last year, at the inauguration of the Future Investment Initiative, he was joined by Blackstone Group President and CEO Stephen Schwarzman and SoftBank Group Corp. founder Masayoshi Son, who had both congratulated the young leader and he had withdrawn $ 65 billion of the kingdom's investments. between them. Neither one nor the other has attended this year.

The bankers who were there generally avoided mentioning the name of the Crown Prince even in private conversations. But they generally had the same strategy: to hope that the world's attention will pbad quickly while maintaining relations after their bosses have escaped the rally in Riyadh, according to at least ten bankers present at this year's conference.

This year alone, the Saudi government and its sovereign wealth This fund, known as the Public Investment Fund, borrowed a total of 27 billion US dollars from banks, including JPMorgan, HSBC Holdings Plc, Morgan Stanley and Citigroup Inc. The price of these trades was 75 basis points higher than the interbank rate offered by London; this is less than 103 basis points in 2016.

Leaders in Washington and Jerusalem who share the Saudis' antipathy toward Iran said they were ready to ignore the crime that, according to the Riyadh government was allegedly committed by dishonest agents. An advisor to President Recep Tayyip Erdogan said Friday that Khashoggi's body had been dismembered to be easily dissolved. "What happened in the consulate of Istanbul is horrible," 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 remains stable."

Politics is not the only disturbance of the western bankers of the kingdom. Many have spent the last two years arguing over a share of the promised sale of Aramco shares, potentially the biggest public call for savings ever made.

Now that the IPO is on hold, Saudi Aramco is preparing to acquire a 70% stake in Saudi Basic Industries. Corp for about 70 billion dollars. Most of these funds will be borrowed by a combination of loans and bond sales.

"This has certainly increased the risk premium we are asking the kingdom," said Rishabh Tiwari, portfolio manager at Swiss Life in Zurich, which totaled 223.6 billion Swiss francs ($ 222 billion) at the end of the year. end of 2017 and holds bonds of Saudi companies. "The agreement [Aramco-Sabic] will certainly be more difficult than a few months ago; it will be more difficult to conclude the deal at the same price.

In Saudi Arabia, politics rarely figured in the calculation. So far, it has been oil prices. In 2016, when bond markets were first used, a barrel of oil was below $ 50 and the budget deficit was over $ 80 billion. Oil is now trading above $ 65 and the deficit is narrowing.

"If you are looking for reasons to buy or sell Saudi bonds, the most important factor is the price of oil," said Paul McNamara, fund manager at GAM. Ltd in London. "I am reluctant to say that there is a Khashoggi factor in the way Saudi bonds are trading. The price of oil is overwhelmingly greater than anything else. "

Bankers point out that Saudi Arabia's economic fundamentals have not changed. And they are optimistic that the return to normal for the sale of Aramco-Sabic agreement will begin next year.

"The more general appeal in the economy and the transition plan have been hit hard," Kamal said of Eurasia's Kamal. . However, eventually, "some Western companies will resume their normal business with the Kingdom and Wall Street will continue to knock on the door of Riyadh."