That’s because the initial euphoria surrounding Crown Prince Mohammed bin Salman’s efforts to overhaul the nation’s economy has given way to scepticism as the kingdom put on hold the initial public offering of oil giant Aramco. A dispute over Canada’s criticism of the jailing of Saudi rights activists has also heightened concerns over the prince’s increasingly assertive policy and the impact it would have on capital flows.

Overseas money managers turned net sellers of Saudi stocks in six of the past eight weeks after MSCI said it will include the country in its emerging-market equity indexes starting June 2019. Global factors, including the roll-back of crisis-era stimulus and a global trade skirmish, have also dented demand for riskier assets.

Overseas investors pulled a net 660.6 million riyals (US$176 million) from Saudi equities in the eight weeks ended August 16. In contrast, they had poured US$153 million in the eight weeks leading up to MSCI’s announcement. The oil-rich kingdom’s key stock index has dropped 5.8% from a peak in July, curbing its advance this year to 11%.

While its 2018 gain is considerable compared to the almost 8% drop in emerging-market stocks, the gauge is lagging measures in neighbouring Qatar and Abu Dhabi.

What’s changed?

Saudi Arabia had gone to great lengths in recent months to suggest that change may now be in the air, giving women the right to drive and reopening cinemas. But in recent months, women’s-rights activists have been imprisoned and prosecutors are currently seeking to behead Israa al-Ghomgham, who participated in anti-government protests in the eastern part of the country.

Then there’s the kingdom’s clash with Canada. Saudi Arabia froze diplomatic ties and new business deals with the North American nation this month for criticising its treatment of women activists. And the diplomatic split with Qatar shows no signs of healing.

The bright side

The decision to shelve Aramco’s IPO – billed as potentially the world’s biggest – in part reflects the kingdom’s much stronger fiscal position, given the government’s spending reform and rise in oil prices, according to Emirates NBD PJSC.

Saudi Arabia’s budget deficit is set to narrow to 4.6% of gross domestic product this year, from 9.3% in 2017, according to the International Monetary Fund. The lender said in a report it expects the deficit to come down further to 1.7% in 2019 due to better collection of a new value-added tax, the assumed expiry of royal handouts, more energy price increases and the containment of spending.

The EM factor

“Investors need to take a longer-term view – 10 years plus – on reform delivery,” said John Delaney, a Dublin-based money manager at Fideuram ISP.

While a cancellation or delay in Aramco’s IPO would slightly reduce investor interest in Saudi Arabia, its upgrade to emerging-market status by foreign index compilers “is still an important positive driver,” Delaney said. The nation accounts for about a third of the weighting in a fund focusing on Africa and the Middle East which Fideuram launched in June, he said.

Saudi Arabia’s inclusion in FTSE Russell and MSCI’s developing-country benchmarks will likely attract US$15 billion in inflows combined in the 12 months between their respective announcements this year and implementation dates in 2019, said Fahd Iqbal, head of Middle East research at Credit Suisse Group AG.

A big deal

When the IPO was initially flagged in 2016, Saudi officials hoped it would raise as much as US$100 billion, based on a US$2 trillion valuation that some analysts have said was too high. The sale was designed to provide the core funding for the prince’s sweeping plans to cut the kingdom’s reliance on oil. Khalid al-Falih, the energy minister, said last week it would continue to work toward an IPO when conditions were right.

But Saudi Arabia is pursuing alternative transactions that may help it to pursue its grand plan. Aramco is weighing selling bonds abroad for the first time in what could be the largest offering ever by a corporate, according to people familiar with the talks. The cash will help fund an acquisition of a stake in petrochemical maker Sabic, valued at about US$70 billion.

In turn, the Public Investment Fund, which owns 70% of Sabic, would obtain the money it had initially hoped to raise from the Aramco IPO, the same people said, asking not to be named because the talks are private.

“Many see the IPO as a cornerstone to fund ambitious reforms in the kingdom,” said Michael Bolliger, the Zurich-based head of emerging-market asset allocation at UBS Wealth Management’s chief investment office. “The future path of domestic reforms will be closely monitored by investors going forward, as it is a key assumption behind the investment thesis of many.”