Saudi Arabia Exposes itself to ‘Rating Addiction’

This very short commentary, the first of two posts today, reacts to the news that Standard & Poor’s (S&P), the world’s leading credit rating agency, is to open a branch in Riyadh, the capital of Saudi Arabia. Only very recently did we discuss the recent developments within Saudi Arabia here in Financial Regulation Matters and, as part of that push to reorganise under the ‘Vision 2030’ banner which is being developed by the Crown Prince, the oil-rich state is attempting to move into the financialised marketplace more; the effect of this will be remarkable for the growth of the country, but will also open it up to the iniquities of the marketplace that plague their Western colleagues; the parasitic emergence of S&P just before Saudi Aramco is floated and the country begins its move away from petro-dollars is no coincidence. The question, then, is what exactly is the country letting itself in for?

S&P received approval to locate to Riyadh this time last year, and plans are underway to bring the rating giant to the epicentre of Middle-Eastern prosperity. S&P Global Ratings President John Berisford was clear in his understanding of this when he stated that the Saudi regulator’s (the Capital Markets Authority - CMA) ‘ambitious enabling program presents significant opportunities for the country and investors alike’. The managing director also confirmed that as Saudi Arabia’s capital markets evolve with the changing strategy, there is ‘prime potential for greater debt issuance’ which creates a ‘significant opportunity for S&P’. However, the IMF’s suggestion that there is ‘hardly any liquidity [in Saudi Arabia] as most investors are of the buy and hold nature’ confirms that this move is not for the benefit of Saudi investors, but for international investors to flood the Saudi marketplace with investment. The obvious response to all of this is ‘so what?’ – it is to be expected that the private company seeks to take as much advantage of a new opportunity as possible; this is absolutely true. The real issue lays with the approach of the Saudi leadership.

Saudi Arabia’s push to move away from oil-dependency makes complete sense in light of the fact that the resource is a finite resource. Yet, what they are exposing themselves to in doing so is something which they have likely not encountered before. The mercenary nature of the large rating agencies means that the Saudis are introducing the perfect cocktail for financial ruin to their border, and further, by way of a clear thirst to encourage investment, and a regulatory framework that has no experience of dealing with these venal companies. The pressure the CMA will be under to allow the rating agency as much flexibility as it can with its methodologies, it approach and its compliance, will be considerable owing to the need for the turnaround to work. Then, further, as this author discusses in a forthcoming article and monograph, the country will be catapulted into a vicious cycle of what is known as ‘rating addiction’ whereby the agencies become systemically intertwined and, effectively, remove themselves from deterrent and punishment.

So, what may be the answer for the Saudis? The push to change direction is valid, but it must be done with great care, and in this particular field that does not appear to be the reality of the situation. The regulators are beckoning, even seducing these companies into the country whilst what they should be doing is developing the strongest framework possible, based upon foreign experience and assistance, so that their fragile social revolution is protected from the iniquities of the marketplace. There is a great risk for the Saudi leadership in constructing and executing this social revolution, and they would be minded to take great care when inviting the fox to the hen house.

Keywords – Saudi Arabia, Credit Rating Agencies, Business, Politics, Middle-East, Finance, @finregmatters