Saudi Crackdown Augments Huge Money, Asset Outflows

There has been no big outflow of money from Saudi Arabia as a result of the anti-corruption crackdown that was announced two weeks ago, Saudi central bank governor, Ahmed al-Kholifey,  has  said.

“We see some increase, but it’s not that much,” he said, adding that the increase was in the form of corporate transfers of funds. Individuals were not moving large amounts of money out of the country, he said, western news outlets reported.

Kholifey repeated statements by top government officials that although individual businessmen had been caught in the crackdown, their companies and the economy as a whole had not been hurt, and companies could still transfer money as usual.

“This has never impacted the companies or their business, except temporarily”, when it took time to transfer powers of attorney from detained individuals to other people, he said.

Kholifey said the bank accounts of as many as 200 individuals had been frozen in the investigation, and that some had multiple accounts. Commercial bankers told Reuters earlier this week that a total of over 2,000 accounts had been frozen.

Systemic Corruption  

The crackdown sent members of the country’s wealthy upper crust scrambling to liquidate their holdings and move their cash offshore, where they might have a better chance of keeping it away from the Saudi government.

Some Saudi billionaires and millionaires are selling investments in neighboring (Persian) Gulf Cooperation Council countries (Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman) and turning them into cash or liquid holdings overseas, the people said. They spoke on condition of anonymity because of the sensitivity of the matter. In Saudi Arabia, some are in talks with banks and asset managers to move money outside the country.

Some of the suspects, most of whom have been rounded up at the Ritz-Carlton hotel in Riyadh, are keen to secure their release by signing over cash and corporate assets, the Financial Times quoted its sources as saying.

Based on investigations over the past three years, authorities estimate that at least $100 billion has been misused “through systematic corruption and embezzlement over several decades”, Attorney General Sheikh Saud al Mojeb said.

“There is no doubt that many offshore investors are reassessing their view of the Persian Gulf Arab states as a stable and predictable place to do business,” said Philippe Dauba-Pantanacce, a London-based senior economist and geopolitical strategist at Standard Chartered Bank. “There is a growing perception that governance is becoming increasingly arbitrary or at least less rule-based.”

Fear Among Investors

In addition to freezing the accounts, the United Arab Emirates central bank asked financial institutions to provide information on the accounts of 19 Saudi citizens, people familiar with the matter said. The regulator asked to be informed of any accounts, deposits, investments, financial instruments, credit facilities, safe deposit boxes or financial transfers linked to the people, according to a circular seen by Bloomberg.

While efforts to curb corruption are welcome, the “speed and breadth of the crackdown has stirred fear among investors,” said Jason Tuvey, London-based Middle East economist at Capital Economics. “There’s the added concern here that the political uncertainty leads to a period of capital outflows that forces Saudi Arabia Monetary Authority to burn through its foreign-exchange reserves at a faster pace,” he said, referring to the SAMA, as the central bank is known.

The arrests have prompted investors from within the region to sell. The sell-off across the (P)GCC cost stocks $17.6 billion on Nov. 8, dragging the collective market capitalization for bourses in the region to $900 billion, according to data compiled by Bloomberg. Persian Gulf investors sold a net $92.5 million of Dubai stocks on Nov. 7, the most since February. The benchmark Tadawul All Share Index closed up 0.3% in Riyadh the same day.

Jobless Saudis

The purge is affecting some of Saudi Arabia’s richest families. For decades, they benefited from a close relationship with the country’s rulers, which helped them win major contracts and partner with international companies seeking a foothold in the Arab world’s biggest economy.

It also comes at a time when the economy is struggling to cope with the slump in oil prices. Unemployment among Saudis is rising and non-oil gross domestic product is barely expanding. The government has raised tens of billions of dollars from international bond markets and has drawn down on central bank reserves to finance a budget deficit that reached about 15% of gross domestic product in 2015.

Some of the country’s wealthy are worried that shifting assets outside Saudi Arabia may draw suspicion and are instead focusing on their (P)GCC holdings, two people with knowledge of the matter said.

Risk Perception

Saudi authorities are striking agreements with some of those detained, asking them to hand over assets and cash in return for their freedom, sources familiar with the matter said.

The deals involve separating cash from assets like property and shares, and looking at bank accounts to assess cash values, one of the sources told Reuters.

One businessman had tens of millions of Saudi riyals withdrawn from his account after he signed. In another case, a former senior official consented to hand over ownership of four billion riyals worth of shares, the source said.

Analysts said the deals may help end uncertainty about the anti-corruption crackdown but could have an impact on Saudi Arabia’s risk perception among investors.

 Riyadh has been cutting spending while raising taxes and fees to curb a state budget deficit caused by low oil prices. The deficit, which hit $98 billion in 2015, is shrinking rapidly and at a high cost to the economy—data in late September showed Saudi Arabia in recession during the second quarter.

The Saudi government has in recent years been pressing wealthy individuals to invest more in the kingdom and bring home some of their wealth from overseas.

Incarcerations

Louis Gargour, founder and senior portfolio manager at London-based hedge fund LNG Capital, said: “From a civil liberties point of view obviously incarcerating people doesn’t give us comfort, and that’s why we’ve seen spreads on Saudi bonds go 50 basis points or so wider.”

Funds started selling Middle East bonds early this month after Saudi Arabia detained dozens of senior officials and businessmen in an unprecedented crackdown on graft.

Credit spreads and the cost of insuring debt against default have increased not only for Saudi Arabia and Lebanon, but across all the (P)GCC states.

More Arrests

Saudi authorities have reportedly detained about two dozen military officials and several businessmen, widening a crackdown that has already ensnared princes, ministers and other wealthy elites.

Commanders in Saudi Arabia's armed forces are among those authorities have swept up as part of a corruption investigation.

The investigation is seen as both a campaign to rein in graft and a move to consolidate power under Crown Prince Mohammed bin Salman, who is widely expected to take his father's place as king sometime soon.

Salman’s another motive was: Replenishing the kingdom’s depleted foreign reserves, which have been hammered for the past three years by low oil prices, with some estimating that the current purge could potentially bring in up to $800 billion in proceeds.

Billionaire investor Prince Alwaleed bin Talal and the former head of the National Guard, Prince Mutaib bin Abdullah, are among the several royals who were detained in the first wave of arrests earlier this month.