29 January 2011
Regional troubles hit Saudi markets
Financial markets in Saudi Arabia are expected to remain volatile in
the current period of regional political unrest. The TASI fell by 6.4
percent on January 29 in response to civil unrest in Egypt. Other
financial indicators such as exchange rate forwards and credit
default swaps have also moved sharply. We viewed the Saudi stock
market as attractively valued prior to the recent fall, but think that
investors should be cautious given the rapidly evolving events.
TASI
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The fall in the TASI was not a surprise after regional and global
markets were hit by the problems in Egypt over the weekend. It has
wiped out all of the gains in the market since mid-October and pulled
the price-to-earnings ratio to below 15. At present the turbulence
elsewhere in the region has not impacted directly on the Kingdom’s
economy or the prospects for most listed companies, but it has
definitely rattled confidence, particularly of foreign investors. In
addition, it has directly hit some Saudi investors; Saudi investors
were net buyers of $126 million of Egyptian stocks in 2010.
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6000
Aug-10
Sep-10
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author:
Paul Gamble
Head of Research
[email protected]
or:
Brad Bourland, CFA
Chief Economist
[email protected]
Head office:
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P.O. Box 60677, Riyadh 11555
Kingdom of Saudi Arabia
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Moves in other financial indicators over the Saudi weekend illustrate
foreign investor caution. One-year exchange rate forwards jumped to
their highest level in two years. Usually, exchange rate forwards
suggest an appreciation of the riyal over the next year, but currently
they are indicating a depreciation (see chart on next page). The price
of sovereign credit default swaps also jumped. These provide
insurance against the government defaulting on its debt and on
January 29 were at their highest level since August 2009. In neither
case are these moves serious; events elsewhere in the region will
not alter the Kingdom’s exchange rate policy and with no external
sovereign debt and minimal domestic debt, there is little meaningful
trading in the Kingdom’s credit default swaps.
A more positive side effect was a rise in oil prices. Troubles in the
region generally cause short term rises in oil prices and this was the
case on January 29, with WTI jumping by 4.3 percent, though Brent
was up by just 0.7 percent. Although events in Egypt, Tunisia,
Yemen and elsewhere, have not directly affected the global oil
market, oil prices are likely to have an upward bias while tensions
continue.
It is far too early to determine what, if any, direct impact there will be
on the Kingdom’s economy. Egypt is one of the larger markets for
the Kingdom’s non-oil exports. Total non-oil exports to Egypt were
$1.3 billion in 2009, 4.2 percent of the total. As Egypt is an oil
producer, its share of total Saudi exports was much lower, at just 1.2
percent (the total was $2.2 billion). Saudi imports from Egypt were
$1.4 billion in 2009, 1.5 percent of the total.
29 January 2011
One-year riyal forwards
1.5
1.0
(basis points)
0.5
0.0
-0.5
-1.0
-1.5
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Jul-10
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Jan-09
Mar-09
-2.0
Direct exposure to Egypt is an issue for some Saudi companies that
have bought into Egyptian companies and established production
facilities, though we do not think that Saudi bank exposure is a
concern. Egypt is not a large source of foreign direct investment into
the Kingdom. A further economic link is the large number of Egyptian
migrants that work in the Kingdom. According to recent data
Egyptians accounted for around 15 percent of new work visas; if they
constitute a similar proportion of the expatriate population, there
would be around 1.1 million in Saudi Arabia. Uncertainty at home
may well affect the amount of money Egyptian expatriates remit from
the Kingdom.
Saudi-Egyptian trade
5.0
4.5
4.0
3.5
($ billion)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2000
2001
2002
2003
Saudi exports to Egypt
2004
2005
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2007
2008
2009
Saudi imports from Egypt
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The data contained in this Research is sourced from Reuters, Bloomberg, Tadawul
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