The Kingdom of Saudi Arabia is facing challenging times. Between leading an embargo against neighboring Qatar, coming to terms with its conservativism, and a corruption war against its own princes, the country is also at risk of seeing a considerable wealth outflow.
Saudi Arabia is the second-largest Middle Eastern market in terms of retail liquid assets, behind only Israel. It is also one of the most invested in the stock market globally. As per our The Global Wealth Market in 2017 report, the country ranks second in terms of the proportion of savings allocated to equities, and it is forecast to maintain this position up to 2021. The country thus represents a lucrative market for wealth managers and family offices, with wealthy individuals needing professional advice to invest their sizable wealth. This includes the sprawling royal family’s assets, of which the total value is often said to be unknown even to the members of the Saud family.
However, this wealth paradise may be under threat. Recent raids led by the crown prince against members of his family are bound to result in a wealth flight. Since November 2017 the prince has jailed over 200 fellow princes and frozen their assets in a campaign against corruption. This represents around $800bn of assets which, in the event the princes are released and their assets unfrozen, is likely to be offshored to avoid further fallout from political instability and the growing power of the crown prince. And the wealthy individuals whose assets have not yet been frozen may choose to relocate them anyway.
A country’s political situation plays a considerable role in driving investment choices. As per our 2017 Global Wealth Managers Survey over 60% of wealth managers globally agree that political instability has a higher weight than macroeconomic conditions when it comes to asset allocation strategies. And in emerging markets (with Indonesia and Turkey the most notable examples) local political instability is the main driver behind decisions to offshore assets.
As an emerging economy, HNW assets would be useful in an effort to modernize Saudi Arabia’s economy. Unfortunately, wealthy individuals will be reluctant to invest or keep their assets in the country due to the current instability and the possibility of further issues. The crown prince’s reforms to develop the country are unlikely to succeed given their seemingly arbitrary nature, and the resulting wealth flight will undermine investments, making it even more difficult for the kingdom to develop and reach the ranks of mature markets.
Wealth managers serving Saudi Arabia’s wealthy will see growth in demand for offshore investments. Despite the recent scandals related to offshore structures, the country’s HNW individuals may prefer bad press to taking the chance of having their assets frozen. Private banks must be ready to accommodate these needs and build compliant offshore solutions for their clients.
By Silvana Amparbeng, Wealth Management Analyst