Mohammed Bin Salman Consolidates Power, Saudi Stocks Soar: “No Question Who’s In Charge”

Right, so a 31-year-old is now basically running Saudi Arabia.

How fun is that?

Overnight, the big news was of course Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman replacing his cousin Muhammad bin Nayef as heir to the throne.

As noted earlier, it might have been “abrupt” (as some in the media portrayed it), but bin Salman was already running defense, oil, the economy, and damn near everything else, and it’s been clear for some time that his star is only going to rise. Indeed, you didn’t have to be a foreign policy scholar to know his dad was probably angling to position him next in line for king.

31 out of 34 members of the Allegiance Council supported the decision.

They put on a fun show for Saudi television which aired footage of bin Salman kissing Nayef’s hand, but it’s pretty clear whose hand (and ass) everyone is going to be kissing in Riyadh going forward.

“It’s clearly a transition that has happened smoothly and bloodlessly. Now it’s clear, it’s straightforward. That kind of clarity lowers the risk. There’s no question as to who’s going to be in charge,” Bernard Haykel, professor of Near Eastern Studies at Princeton, said, on the way to telling Reuters that the king’s decision was aimed at avoiding a power struggle between his son and Mohammed bin Nayef by setting the line of succession out clearly.

Iran’s not loving it. “Soft coup in Saudi Arabia/Son becomes the successor of the father,” a headline on Iranian state TV’s website reads this morning. Last month, the Ayatollah called the entire royal family a band of “idiots.”

“It is not really a question of if but rather of when a new escalation with Iran starts, given Mohammed bin Salman’s growing influence in Saudi Arabia,” Petromatrix analyst Olivier Jakob said in note on Wednesday, emphasizing that Saudi foreign policy has become more “aggressive as bin Salman’s influence and power have grown.”

Of course Oman’s Sultan Qaboos, Jordan’s King Abdullah, and Egypt’s Abdel Fattah al-Sisi all called to congratulate bin Salman. And so did Yemeni President Abd-Rabbu Mansour Hadi, which makes sense because bin Salman is leading the war to oust the Houthi rebels who (literally) forced Hadi to flee screaming to Riyadh from Aden back in March 2015.

Clearly, the consolidation of power in bin Salman has profound implications for the Saudi economy. He’s the architect of “Vision 2030,” which means the more power he gets, the greater the push to diversify the economy away from its dependence on crude. It also means the Aramco IPO will likely be championed even more aggressively than it already was. Here are some useful comments from John Sfakianakis, director of research at Gulf Research Center in Riyadh:

  • Bin Salman will make sure the Aramco IPO will happen
  • The crown prince is “the architect of the Vision 2030” and the Aramco IPO is “a cornerstone of the vision”
  • Saudi Arabia will even try to push for more dominance in OPEC. Bringing in Russia to the deal was hard without Prince Mohammed’s role behind the scenes”
  • “He will also make sure that the country in the long-term will move away from oil. But in the short-term Saudi Arabia will still remain focused on using oil revenue to support its diversification plans”
  • Saudi oil policy will be business as usual meaning that they will continue to look at supply imbalance in the market and if the situation requires a further cut or interference, the Saudiswill consider taking further actions”
  • “Deepening the cuts of OPEC is now a very likely scenario if oil prices continue to tumble”

And here’s what Bloomberg’s Julian Lee thinks:

  • Appointment of king’s son, Mohammed Bin Salman, as crown prince may lead eventually to more aggressive pursuit of Saudi interests within OPEC should oil market become more balanced and prices rise, writes Bloomberg oil strategist Julian Lee.
  • Policy of managing oil supply to bolster prices and seeking outside support for OPEC actions from countries like Russia will continue
  • If prices recover, kingdom may stop unilaterally making bigger-than-agreed cuts in order to offset under-compliance by some other OPEC members, as it has done since output curbs were implemented in January
  • Under MbS, as crown prince is known, Saudi Arabia has already shown willingness to pursue its own interests over those of neighbors
    • Fields shared with Kuwait were shut from 2014, and have not reopened despite repeated assertions from Kuwait that production would restart
    • Sanctions on Qatar, including restrictions on ships carrying its oil, gas exports, now in 3rd week with emirate still awaiting list of demands from Riyadh
  • Iraq, which is over-producing most against its target among major OPEC members, may face stronger criticism from the kingdom
  • The elevation brings greater certainty to long-term direction of Saudi oil policy, ensures initiatives like Aramco IPO will not be derailed when leadership passes to next generation

The timing here was fortuitous for Saudi stocks as it comes on the same day that MSCI put Saudi Arabia on its watch list for potential classification as an EM (which would mean shares in the kingdom’s most-traded companies could be included in major indexes for developing-country stocks).

The MSCI news and the royal shakeup conspired to send shares in the kingdom sharply higher:

Saudi

(BBG)

“From now until 2018, when MSCI’s decision on adding Saudi Arabia to emerging market list is expected, a positive sentiment should prevail among investors [as] MSCI’s move should lead to improved liquidity in the market for so many stocks, mostly the banking sector,” Mazen Al-Sudairi, the head or research at Al Rajhi Capital in Riyadh said today. The Tadawul Banks Index was up 6%, with all 12 members gaining.

Notably, today’s gains helped the Tadawul All Share recoup all YTD losses (the index had been down as much as 5.9% since the start of the year):

Saudi2

(BBG)

For now, we’ll leave you with BofAML’s reaction…

Via BofAML

Smooth political succession to bring back focus on reform

The elevation of Prince Mohammed bin Salman to the position of Crown Prince completes his gradual consolidation of power on both political and economic fronts. While the political developments have been unprecedented, we expect a relatively smooth political succession. The Royal decrees published today suggest that 31 out of 34 members of the Allegiance Council supported the measures. It is unclear who headed the Council after the passing away of Prince Mishaal bin Abdulaziz al-Saud. Importantly, former Crown Prince Mohammed bin Nayef pledged public allegiance to the new Crown Prince. This was followed by the allegiance of the Supreme Council of Scholars. Key will be today the public pledging of allegiance as this will highlight the level of domestic support to Crown Prince Mohammed bin Salman.

Priority will go towards domestic politics near-term

Crown Prince Mohammed bin Salman is likely to focus on strengthening domestic support in the near-term. Potentially reflecting divisions in the Royal Family, the Royal Decrees amended the Basic Law to require that the King and Crown Prince come from different branches of the Royal Family going forward. Prince Abdulaziz bin Saud, a nephew of Prince Mohammed bin Nayef, was named the new Minister of Interior, among a number of other administrative appointments. The Eid holiday period was extended by a further week. Further measures may be announced. Regionally, Crown Prince Mohammed bin Salman will likely maintain a hawkish foreign policy in regards to Iran relations and the GCC-Qatar dispute.

Cementing economic reforms, with a delay

Crown Prince Mohammed bin Salman’s elevation is likely to cement the economic reform agenda. He is seen as the architect of the Transformation agenda in his capacity as Chair of the Council of Economic and Development Affairs (CEDA). However, the timing of this political development may suggest a delay to the start of the next phase of economic reforms (gasoline, diesel, electricity prices for households) from July to some later time in 2H17 (at least until after the peak consumption summer months pass). The fiscal impact of these measures may however be fully offset by a possible concurrent delay to the start of the Household Allowance program. The amendment to the reinstatement of public sector allowances to make it apply on a retroactive basis will only widen the fiscal deficit by SAR7bn (0.25% of GDP). However, a key risk is that this will also reduce fiscal and policy-making flexibility to respond to an oil price drop.

Energy policy stays the course

We do not see changes to energy policy in the near-term, but high oil prices remain critical for Saudi Arabia. As we have highlighted here, the US$40-50/bbl range for oil prices is a grey zone where the budget impact of current OPEC cuts is unlikely to be positive for Saudi Arabia, and where the success of fiscal reforms is not guaranteed. As such, further Saudi production cuts alongside the rest of OPEC and non-OPEC oil exporters may be contemplated going forward. However, Minister of Energy, Industry and Mineral Resources al-Falih recently ruled out an immediate need to adjust the OPEC/non-OPEC deal. Also, the more challenging market dynamics are likely to test OPEC cohesiveness and consensus decision-making going forward.

 

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