Saudi Arabia suddenly arrested powerful royals and businessmen over the weekend, in what officials call an anti-corruption drive, but outside observers deem domestic power consolidation.
Either way, the move is likely making investors see Saudi assets as riskier, so they`re set to demand higher returns.
Some believe the extraordinary purge is an attempt by 32-year-old Crown Prince Mohammed Bin Salman to consolidate his power by eliminating potential rivals. That may herald political uncertainty, tension and possibly unrest not seen before in the history of OPEC`s biggest oil producer.
Among those removed from power was Prince Miteb Bin Abdullah. Prince Miteb, relieved of his post as head of the National Guard, was once considered a contender for the throne.
"It is not possible to remove and imprison all these top princes and all will be business as usual," warned Fereidun Fesharaki, founder of energy consultancy FACTS Global Energy.
That expectation of a new normal will likely mean investors need a higher risk premium — the additional expected return on investment compared to a risk-free (but otherwise identical) asset — to invest in the Kingdom.
"This should increase the risk premium for Saudi assets," said Alastair Newton, a political analyst heading Alavan Business Advisory and a former British diplomat.
Saudi government bonds and credit default swaps will likely reflect the weekend`s developments "in the coming days," Newton said, adding investors` assessment of the Saudi Aramco share sale, which may value the state oil giant at $2 trillion or more, could also be impacted.
For what it`s worth, Saudi Arabia`s Finance Ministry said Sunday that the country`s new anti-corruption committee and detention of prominent figures actually enhanced confidence in the rule of law, Al Arabiya television reported.
But even if they are now worried about political risks, investors may eventually buy the argument that business can win from the weekend`s events, especially as the crown prince leads a broad initiative to reshape the Saudi economy.
"This is the latest act of concentration of power in Saudi. As unprecedented and controversial as it may be, this centralisation might also be a necessary condition for pushing the austerity and transformation agenda, the benefits of which very few investors are pricing in," Hasnain Malik, global head of equity research at the investment bank Exotix Capita commented Sunday.
The anti-corruption campaign is "clearly a preemptive move by MBS [Mohammed bin Salman] to further establish his authority and remove any opposition to his reform plans, and gain some public support for some difficult economic and social reforms," said Robin Mills, CEO of Qamar Energy, and a former Shell executive. "If the political shake-up passes relatively smoothly and the reform plans begin to move ahead, though, it will be positive.
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