Daily Management Review

JASTA brought down Saudi Arabia's stock exchange


09/29/2016


Saudi Arabia has planned to raise $ 10-15 billion in international financial markets to finance the country’s living. However, the new law adopted in the United States could complicate those intentions.



Tribes of the World via flickr
Tribes of the World via flickr
Recall that the US Congress passed a law ‘Justice Against Sponsors of Terrorism Act’ (JASTA), even though President Barack Obama has previously vetoed.

This law could seriously worsen the strategic and economic alliance between the US and Saudi Arabia.

News of the law’s adoption brought Saudi riyal down to the lowest in four months. The stock market are showing the strongest drop in the world for the second day in a row. In the last days, Tadawal All Share Index has already shown a weak trend. It’s dropped to its lowest level since the beginning of this year.

Such a bad condition of the kingdom’s financial market can seriously complicate or delay sale of bonds, Bloomberg writes.

JASTA could hurt Saudi’s plans, but is unlikely to completely negate their efforts. In any case, Saudi Arabia will be released on the international capital market, just the question is when and under what conditions.

This law is more a political than an economic problem, but it is still topping the kingdom’s financial problems. The budget deficit in 2015 reached 16% of GDP, which is the worst figure among the world's 20 leading economies. Despite the austerity measures, the deficit will decline only to 13.5% this year.

Riyadh has wasted about $ 150 billion of its financial reserves since 2014. In May, Moody's downgraded debt of Saudi Arabia to "A1", which is lower than ratings of Abu Dhabi and Qatar.

The government is trying to correct the fiscal imbalance with a large-scale plan of economic reforms, new taxes and cuts in public spending. However, lower oil prices mean that the problem is still here. A few days ago, the government cut ministerial salaries by 20%.

Perhaps this is why Saudi Arabia tackled the issue of freezing production, and even managed to negotiate production cuts within OPEC. Prices of Brent have almost returned to $ 50 per barrel.

Final impact of the new US law is yet to be seen, and Saudi Arabia has a little chance to resist it. 

Earlier, Riyadh has threatened to sell US Treasuries, if the law is passed. Yet, the statement turned out to be not very realistic.

In March, Minister of Foreign Affairs of Saudi Arabia Adel al-Jubeir during his visit to Washington said that the kingdom would start selling treasury securities and other property of the United States for total of $ 750 billion.

In May, the first time in nearly 40 years, the US Treasury revealed Saudi Arabia’s share in the total volume of Treasury bonds. It turned out that in March, the OPEC leader owned $ 116.8 billion in the US bonds.

This is a large sum, but is much lower, for example, than that of China ($ 1.2 trillion). Even if Saudi Arabia sold all the bonds, it would not lead to any serious consequences in the market.

However, this is just the official figures. It is well known that many countries are buying US bonds through offshore centers, such as, for example, Belgium. In reality, the Saudis can control much more. In addition, there are still "other assets", although it is not very clear what is meant.

In theory, a quick sale of assets of $ 750 billion could actually affect the market, but it is unlikely to cause a full-fledged crisis.

source: bloomberg.com






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