Interpreting Middle East Economic News and Analyzing Market Trends

What’s behind the Saudi stock market plunge? (Hint: oil)

Image Source: Gulf Business

 

Traders in Saudi Arabia have been questioning the reasons behind the market’s recent plunge according to Reuters, but the answer is right in front of them.

 

 

Here’s the story from Reuters:

 

A Saudi Arabian official denied media reports that this month’s plunge of the Saudi stock market was due to government bodies selling shares to raise money following the drop in oil prices, state news agency SPA reported on Wednesday.

“An official source announced that this claim is utterly and totally not correct,” SPA said without naming the official or specifying where the media reports appeared.

The official was quoted as saying that daily stock exchange data showed there had not been any unusual selling or buying of shares by the government or related bodies in recent days or weeks.

Read the full story here.

 

The reason for the market’s drop is obvious:

 

TASI vs Brent Crude 1-1-2014 to 8-20-2015

Chart Source: Trading Economics (click on image to enlarge)

 

The Saudi stock market is more correlated with the price of oil than any other market. The recent plunge is directly related to the collapse in oil prices.  Other markets in the MENA region have not done so well either thanks to oil:

 

MENA Stock Markets YTD to 8-20-2015

Source: Global Investment House. YTD data as of Aug. 20, 2015.

 

Based on the level oil prices have fallen compared to MENA stock markets, I say there is a lot more room for stock markets in the region to fall.  Bloomberg recently covered the Saudi government’s return to the bond market, where it plans on issuing up to $27 billion in bonds in 2015.  Here’s more from Bloomberg:

 

After an eight-year interlude, Saudi Arabia’s government bond sales are coming alive.

The desert kingdom that’s home to both the world’s second-biggest oil reserves and Islam’s holiest sites sold on Monday five-year debt with a coupon of 1.92 percent, seven-year notes at 2.34 percent, and 10-year securities at 2.65 percent, according to two people familiar with the matter. The government didn’t say how much was sold, though two people with knowledge of the plan said last week it aimed to auction as much as 20 billion riyals ($5.3 billion) as part of a program to raise a maximum of 100 billion riyals by year-end.

The country’s renewed appetite for debt comes against a backdrop of deepening involvement in regional conflicts in Yemen and Syria, and a budget deficit that’s poised to widen to the most since 1987. For Mazen Al-Sudairi, the program also underlines King Salman’s resolve to maintain spending amid a collapse in oil prices, the country’s biggest revenue stream.

 “Oil prices have given incentive for the government to issue bonds now,” Al-Sudairi, the Riyadh-based head of sell-side research at Alistithmar Capital, a unit of Saudi Investment Bank, said by phone on Sunday. The debt sale “also shows the government’s confidence in its oil and development policies. We have so many infrastructure and energy projects that will need funding,” he said.
Read the full story from Bloomberg.
 
The country has been absent from the bond market for years as they rode the oil price wave up.  However, now that oil prices have fallen and will remain depressed for many years to come, we can expect a lot more Saudi bonds coming to the market.  We can also expect other Gulf countries to follow suit.  All Gulf governments have massive development plans which were given the green light when oil prices were above $100.  Today, these governments are stuck with two choices; either suck money out of their wealth funds or fund budget shortfalls by issuing bonds.  The latter seems like the likely choice given the fact that they believe oil prices will rebound soon as they did in 2009.