Foreign investors keeping close eye on Saudi stock exchange situation (page 1 of 2)

Although officials have since denied its existence, a document seen by newswire Reuters in January this year apparently showed that at a December 2010 meeting, Saudi stock exchange officials asked representatives from regional banks and brokerages to check capabilities for handling foreign accounts. "We might see the markets opening up in the first half of 2011 or probably in the second quarter," a source familiar with discussions told the newswire. "It's not a question of if it will happen, but when it will happen."

The world's largest oil exporter is rolling out a $400bn infrastructure programme and foreign investors are keen to tap new opportunities in the Gulf's biggest economy. However, foreigners make up only a small percentage of trading on the Saudi bourse, known as the Tadawul, as they do not have the right to buy shares directly, and are instead forced to go through Saudi intermediaries who technically own the stock under the current rules.

"The market has relaxed a little over the last two years, and I'm sure direct foreign investment will happen in the end," says Hans Zayed, head of MENA research at Rasmala Investment Bank. "Of course it would help a lot if foreign investors could have direct access, as there is less counterparty risk if you can invest directly into a market, and some investors are restricted from buying participatory notes (P-notes) or swaps."

Saudi bourse opened to GCC national in 2007

The bourse was opened to GCC nationals in December 2007, as part of the moves to establish a GCC common market. In August 2008 the CMA announced that non-Arab foreigners would be permitted to participate in share trading through share-swap transactions with local CMA-approved and -licensed intermediaries. And most recently, in March 2010, Falcom Financial Services Company was permitted to introduce exchange-traded funds (ETFs), which are traded like stocks - and which the the Capital Market Authority (CMA), the kingdom's financial regulator, has said it is keen to encourage.

Nevertheless, the kingdom's march towards direct foreign investment has been by no means relentless. Officials are concerned that the inflow of short-term speculative capital, or 'hot money', can destabilise a market, and while the presence of large foreign institutional investors would be welcomed, the bourse would nevertheless be more exposed to the ebbs and flows of international economics.

"It is not that I want to shield the Saudi market... [but] we are more concerned about hot money and we want to see it in a very well organized way that they are coming into our... market," Abdulrahman Al-Tuwaijri, chairman of the CMA, said last year.

"The markets here saw a tremendous boom between 2004 and 2006, but then there was the most unseemly crash, and in some cases astonishing amounts of money were lost," explains Marc McFarland, Emerging Markets Economist at Emirates NBD.

"There is now a determination to try and avoid the same thing happening again, and opening up a market quickly and without the right checks and balances being in place, you risk exposing yourself to inflows which could lead to a repeat of that bubble. So there is caution among policymakers."

Setback suffered last year

Another setback occurred in July last year, when the widely tracked and influential index provider MSCI announced that it would drop all indices with Saudi stocks after failed negotiations over the licensing of information.