LONDON/DUBAI: The likely promotion of conservative Prince Nayef as heir to the Saudi throne threatens investment sentiment only if he becomes king soon after and the focus will shift to the next line of leaders after an octogenarian elite.
The death of Crown Prince Sultan, announced on Saturday, leaves King Abdullah with the task of summoning the Allegiance Council of the ruling Al-Saud family to approve his preferred heir.
Most analysts believe the new crown prince will be Nayef, who was appointed second deputy prime minister in 2009, a position usually given to the man who is third-in-line to rule.
With the Arab Spring erupting around him, Abdullah moved quickly to buy peace with his citizens with a populist $130 billion package that stabilized stock prices across the Middle East as investors realized the regional heavyweight was safe.
His continued rule is seen as key to keeping the lid on any potential trouble in a country that is a key US ally and home to a fifth of global oil reserves. Succession by Nayef — if he becomes crown prince — could raise concerns.
Saudi stocks traded flat after the announcement of Sultan’s death.
"Saudi Arabian markets have believed for the past year that Nayef is one heart beat away from the top job, and that is priced in. However, when the question arises of his actually ruling, that’s a different ball game," said Mohammed Ali Yasin, chief investment officer at CAPM Investment in Abu Dhabi.
"He has a very different style of management — his support base within the country is not as strong as King Abdullah’s. This could bring about a change in foreign policy and policy within, and may raise questions of political stability."
Nayef, who has close ties to the country’s powerful Wahhabi clergy, has been interior minister since 1975 and has managed the kingdom’s day-to-day affairs during the absences of both the king and crown prince.
Analysts said his strong hand against Al-Qaeda and the Shi’ites raised fears of a rise in the temperature at a time when sensitivities in the region were high, and there are worries he could force Saudi companies to hire locally.
There is, of course, the possibility that he might follow a moderate line if he became king, in line with Al-Saud tradition of governing by consensus.
Saudi is the biggest market in the region and home to the top companies including petrochemicals giant SABIC , largest Gulf banking group Al-Rajhi and Saudi Telecom , the biggest telecoms firms in the Gulf by revenue.
The kingdom has been enjoying a period of high crude prices. Brent trades at $109 a barrel, up from around $90 at the beginning of the year, having hit highs of near $130 in April and May.
Regional instability has taken its toll on investments, even if the oil price has cushioned the blow.
According to data compiled by analysts, the Saudi stock market suffered net outflows via the swap mechanism of 1.4 billion Saudi riyals ($373.3 million) in the January-September period.
Shares have fallen about 8 percent this year, doing better than many peers. For perspective, Egyptian shares have lost about 40 percent.
Stability, growth and participation.
The pressure on the ruling elite is clearly on, and investors will be watching carefully, especially as the succession beyond Nayef, if he were to become king, is extremely unclear.
"The ruling family, born when the kingdom was just a desert, will have to successfully transition the country in less than ten years, in order for it to meet the aspirations of its younger population," said Daniel Broby, chief investment officer at Silk Invest.
"It is an immense challenge, but the Kingdom has the financial resources to pull it off. I expect Prince Nayef’s first move will be to announce some populist decree."
Abdullah is in his late 80s and recently had back surgery. Nayef is about 77 and the age of the late Sultan was officially given as 80.
While a potential accession by Nayef could raise concerns in the short term, of greater importance is what happens after that.
"It’s also important that the Saudis send a clear signal about the next line of leadership after Abdullah, and Nayef, about which direction they are going to follow, especially as Nayef has his own health problems," said Yasin.
Unlike in European monarchies, the line of royal succession does not move directly from father to eldest son, but has passed down a line of brothers born to the kingdom’s founder King Abdulaziz Ibn Saud, who died in 1953.
So far, five brothers have become kings and around 20 are still alive, but only a few of those are thought realistic candidates to rule the country.
Foreign investors want stability and growth — but also the means to participate in it.
The region’s largest and most liquid stock market only allows indirect foreign ownership via so-called swap agreements or participatory notes. It does not allow foreign funds to directly own and trade Saudi shares.
"With regard to foreign investors, opening up market for direct access will be the key and those plans continue to remain on track," said Rami Sidani, Schroders portfolio manager and head of Middle East investment in Dubai.
"Markets will speculate on the date but the broad message is that as a means of attracting foreign investments to the country and eventually creating efficient capital markets, access to foreign investors is key."
