Saudi stocks highest-ever close

Last week the Saudi Arabian stock market closed at its highest level since it first opened in 1985. It was a truly historic week with the NCFEI all-share index up 1.5% at 2,408.41, or 6.6% since the start of the year.

This performance may appear pedestrian compared with the Kuwait Stock Exchange's 25% in 2001. But it shows that the two biggest Arab bourses are now beginning to reflect reality, although the real fun may have only just started.

To be fair, the Saudi bourse clocked up an impressive gain last year, at a time when other Gulf stock markets were slow to acknowledge the upside of surging oil revenues. What appears to be driving the market now is a feeling of a new economic era, ushered in by the opening of the Saudi domestic market to serious foreign investment.

The Saudi Gas Initiative is worth $25-30 billion in its initial phase, and possibly a spectacular $50 billion in total. Plugging this sort of investment into an economy as relatively small as Saudi Arabia will put a rocket under local business. It also signals a welcome openness to modernisation and economic reform, and likely foreign investment in other sectors.

The Saudi stock market itself is likely to under go considerable internal reform. A draft law proposes moving from the current inter-bank bourse to a full public market with international standards of transparency and disclosure. This is likely to increase the attractiveness of stock market investment, and hence force up share prices further.

Local investors have also been heartened by a recent decision to lower customs duty to 5%, which can only serve to stimulate trade, and also by the outlook for oil prices. Ironically, Iraq's June 4 decision to take 2.2 million bpd off the oil market is proving beneficial to its former enemy Saudi Arabia by keeping oil prices high, and providing additional demand at the same time.

Under these circumstances, it is perhaps surprising that the Saudi bourse has not moved even higher, and of course it may do so if the year continues to be so positive for business in the Kingdom.