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Saudi Arabia opens stock exchange to foreign investors

Despite numerous restrictions, the future for the mammoth Saudi market looks bright

Saudi Arabia opened its stock exchange to foreign investors for the first time last week. Amid expectations that international institutions would queue up to trade in the largest bourse in the Arab region, stocks fell on the day it opened its doors to outsiders. While some market experts are very optimistic about the new move, others have warned about the restrictive nature of the opening.

Mammoth market

Saudi Arabia’s Tadawul is bigger than all the bourses in the six-nation Gulf Cooperation Council (GCC) combined.  Around 170 companies, which focus mainly on real estate, oil and banking, trade on the stock market with a total market value of more than $550 billion. Tadawul’s daily trading volumes of about $2.4bn also makes it bigger than the main bourses in South Africa, Russia, Turkey and Mexico, according to the latest data from the World Federation of Exchanges.

Also, the market is the top performer in the region with the Tadawul All Share Index (TASI) up 15 per cent since the start of 2015.

Opening up

Saudi Arabia’s Capital Market Authority (CMA) announced on 15 June that it was opening the market to direct foreign investment. The kingdom, which is a member of the G20, is the last from the group of the world’s largest economies to remove barriers for international investors. Since 2008, when the country began allowing foreign investors indirect access to the market, foreign investors were permitted to buy Tadawul stocks only through participatory notes and exchange-traded funds. The CMA stated that, going forward, Qualified Foreign Investors (QFI) can commence dealing in listed shares.

Why now?

The kingdom has seen a sea of changes this year. After coming to power, King Salman has been making efforts to reduce his country’s reliance on oil income, which accounts for about 90 per cent of government revenue. The country suffered from a plunge in oil prices over the past year and its military intervention in conflict-hit Yemen has also been making things worse.

The CMA says it wants to grow its institutional investor base in order to promote market stability and reduce volatility.

The move also comes after index compiler MSCI Inc said that it would look to add Saudi Arabia to its emerging markets index. MSCI added Qatar and the United Arab Emirates last May to the premier group, which would help the markets draw in funds from investors who track the index.

Restrictions

The rule is that QFIs that manage $5bn of assets (or $3bn if the regulator makes an exception) with a five-year investment record can now buy and sell shares in listed companies on Tadawul. This means that only the biggest financial institutions – such as banks, brokers and fund managers – will be given the green light for now. The specifics will keep small fry out.

Also, no single investor can own more than 5 per cent of a company and the overall foreign ownership of that company cannot top 49 per cent. Overall, only 10 per cent of equity in the stock exchange can be foreign-owned.

So why there are loads of rules: The CMA wants to filter out hot money. They intend to reduce market volatility, which was among the world’s highest earlier this year, by attracting institutional investors that have long-term aspirations.

Yet attractive

With a growing middle class and a very young population (more than half of its nationals are under the age of 30), spending is expected to increase several-fold. Consumption can drive the economy more as it becomes more diversified. Economists predict that the non-oil sector will continue its impressive growth rate, which stands at around 5 per cent this year.

Saudi Arabia is also among the most active initial public offering markets in the region. Last year, its biggest local lender, National Commercial Bank, raised $6bn in the largest share sale ever in the Arab world.

Looking ahead, interest may shoot up in a few years if Saudi moves on from its frontier market status to join the most widely followed emerging markets index, the MSCI.