By Karen Leigh
Regional stock markets will continue to reflect the higher perceived risks, bank says
Credit Agricole CIB said continuing unrest across the MENA region will keep Saudi Arabian markets volatile.
As anti-government protests explode in Bahrain, Yemen, Libya and Egypt, Saudi has emerged as one of the region’s most stable economies, and should oil production in Libya continue to reduce, it could further solidify its status and fill the gap by producing four million barrels per day.
But its entire economy isn’t immune.
“There is no doubt that uncertainty about the wider Middle East will continue to impact Saudi Arabia’s CDS [credit default swaps] or could at some point impact SAR forward rates, should uncertainty escalate further,” Agricole said in a note. “The strength of events in Tunisia, Egypt, Bahrain, Libya as well as Yemen has led most to expect the worst to come for the rest. Differentiation and re-classification of risk is warranted, but it takes time for the dust to settle. Regional stock markets will continue to reflect the higher perceived risks.”
The market shifts in Saudi come as local markets are beginning to price a shift of contagion from North Africa to GCC economies, namely Bahrain and Saudi.
“The possibility of contagion spreading to Saudi Arabia remains low although markets are pricing a higher risk premium. Bahrain's future is a leading indicator but there is not enough clarity about short-term political outcomes,” Agricole said.
As unrest continues, there will likely be more pressure on Saudi’s markets. However, its overall economy – boosted largely by oil capacity that dwarfs its neighbours – will stop it from seeing the same level of volatility that doomed Dubai’s credit markets in 2008.
“Markets will continue to price additional risk premiums despite the arguments put forward about Saudi Arabia’s fiscal and political capacity to weather the regional crisis,” the note said. “The CDS spreads have widened recently. However, they remain far below the level they reached during the Dubai crisis. The spread could remain large or widen further in the short term.”
The analysts also described the challenges posed to emerging markets in the region, by both inflation and MENA turmoil.
“It remains unclear when the situation could stabilise on either front, and it may be worth beginning to position for bad news,” they said.
But on the FX front, “no EM currency is sending an obvious sell signal, and an easier option could be to go long those currencies benefiting from higher commodity prices. On the rate side, it could be worth paying EMEA rates selectively and buying linkers. Meanwhile, safe-haven flows into bonds amid geopolitical risk could result in bond outperformance.”