Recent changes in Saudi Arabia have not caused big market moves. Even so, Saudi politics could impact the rest of the world in one of three ways, explains Global Chief Economist Paul Donovan.
Saudi Arabia can have a global impact through the oil market. Oil prices would react if Saudi Arabian changes led investors to question Saudi political stability, or relations with other countries in the Gulf (notably Iran). To date, investors do not seem unduly worried about these risks.
If Saudi investors worry about the safety of their local assets, there may be some flight to safe havens. This does not appear to be happening so far. The Swiss franc has been very stable against the euro, for instance.
Perhaps the biggest potential impact of Saudi changes is via global capital flow. Media reports suggested that assets seized by the government may be used to fund domestic spending. Even on official data (likely to be an underestimate) over 35 percent of Saudi Arabian bond and equity investments are in the United States. Less than 15 percent of Saudi imports come from the United States. If assets are sold to fund spending, Saudi Arabia will be selling US assets to buy goods and services from Europe and Asia.