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Saudi super sale masks broken system

There is no doubt that Saudi Arabia’s $17.5bn bond placement last week was a success. But while the country’s Vision 2030 plan is an attractive narrative, it is too simplistic to think of it as a handbook to economic recovery. Investors should be wary.

The deal was well executed and performed well — a deal of the year contender. But what it masks, and what many overlooked, is a country that needs to implement a cultural shift in its economy, as well as a fiscal one. That will not be easy.

Doubtless, the world’s yield starved investors will lap up a Saudi market return, but after the euphoria surrounding the first deal, real signs of progress will have to be made, or there will be little upside return on following the $17.5bn already invested in this stagnating giant.

This week, a senior Saudi official was quoted saying that the country could go bankrupt in “three to four years” unless serious cuts are implemented to trim the public sector. This is all part of what Vision 2030 aims to achieve. 

But what worried dedicated EM investors is that Saudi’s delegates, though eloquent and persuasive, were unable to provide a clear and detailed plan as to how they would balance the government’s budget.

“There was nothing that gave us any real conviction as to where the credit will be in three to five years’ time,” said one. “They could not provide figures for even 2017.”

Raising costs and cutting subsidies marks the end of state profligacy but already signs of unrest in the country are evident. In September hospital workers went on strike after wages were not paid for four months. 

Saudi Arabia's future might not be everything the brochure suggests. If it wants the same sort of enthusiasm for the rest of the $60bn it needs to raise, it might need to offer a bit more than some sharp looking PowerPoint slides.

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