Morgan Stanley Capital International (MSCI) announced in June that it would include Saudi Arabia in its emerging markets index.
The decision is widely regarded as being tantamount to a vote of confidence on the ongoing reform initiatives carried out by Mohammed bin Salman, the Saudi crown prince.
To some extent, there is indeed fairly substantial ground for the market confidence in the Saudi economy. After all, Saudi Arabia is currently the only Middle East country within the G20.
Besides, Prince Salman’s concerted and extensive efforts at improving the overall business environment of his country, such as fully opening up the market for foreign competition, establishing special economic zones, cracking down massively on corruption and easing religious restrictions on women, have obviously paid off.
Today, Saudi Arabia is home to the largest financial market in the Middle East, with the total value of all its publicly traded companies aggregating nearly US$532 billion back in 2015, and up by 13.3 percent this year.
Moreover, the Saudi exchange traded fund (ETF) was the second-best performing ETF around the world as of April this year.
Recognizing the tidal wave of rapid economic growth in Saudi Arabia, the FTSE has also recently announced that it is going to include the kingdom into its emerging markets index by March 2019, thereby further fueling the global bullish sentiment on the Saudi market.
However, in my view, there is still actually a long way to go before Saudi Arabia can truly become a global economic power, and I feel that the road could also turn out to be both bumpy and full of uncertainties. Here’s why:
First, the Saudi economy continues to rely overwhelmingly on oil production, with large oil firms such as the state-owned Aramco making up the bulk of the country’s asset values.
The lack of diversity of the Saudi economy has raised quite a lot of concerns about its sustainability.
Second, Saudi Arabia isn’t the only country that is striving to become the financial center of the Islamic world. Malaysia, Turkey and even Iran have also been working aggressively in recent years to achieve that status, apart from other places such as Singapore.
Given this, Riyadh is definitely going to face a lot of strong competitors in its bid to become the global Islamic financial hub.
Last but not least, despite Prince Salman’s untiring efforts to reform his country, today it is still somewhat risky to invest in Saudi Arabia. Ironically, the prince’s personal ambitions, to a large extent, are the very sources of such risks.
It is because even though his high-profile military interventions in Yemen and Syria haven’t scared off global investors yet, his inability to fully consolidate his power domestically as well as the potential backlashes from the powerful local vested interests under the country’s rampant crony capitalism are all casting a deep shadow of doubt over how long his “new deal” can last.
There are indeed considerable concerns among investors that it might only take a single, medium-sized financial storm to undo whatever Prince Salman has achieved.
At present, Saudi Arabia is trying to establish more experimental special economic zones that are free from national security risks and can therefore attract more foreign investments
In the process of doing so, the government in Riyadh has been drawing quite a lot of insights from the “One Country Two Systems” model adopted by Hong Kong.
But it will take at least 3 to 5 years to tell the efficacy of Riyadh’s initiatives. We also have to bear in mind that the religious and political conservatives within the country are eager to go to any lengths to sabotage the reform program.
As such, many of my friends who constantly travel to Saudi Arabia have remained very cautious about the economic outlook for the country. Even the most optimistic ones would only say: “Let’s see what happens”.
This article appeared in the Hong Kong Economic Journal on Aug 2
Translation by Alan Lee
[Chinese version 中文版]
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