Saudi Arabia’s Capital Market: Foreign Investors Told “Not Just Yet”

The regulator of the Saudi Arabia stock market – by far the largest of the Gulf Region – isn’t making any promises to foreign investors yet. Former World Bank executive director Mohammed al-Sheikh, now chairman of the Capital Market Authority (CMA), recently said that the kingdom remains “interested” in foreign investors. However, no timetable has been set for the opening up of the market.

Mr al-Sheikh indicated that his agency is still hard at work on a series of regulatory changes that aim to make the Saudi Arabia stock market less volatile and more transparent. Reporting requirements are being tightened and caps are being put in place that limit price fluctuations of newly listed stock on their first day of trade.

“There are still a few logistical difficulties to overcome and we are not entirely satisfied yet. These imperfection will, however, be ironed out and the result should be a market that is attractive to foreign and domestic investors alike,” said Mr al-Sheikh.

Since 2008, foreign investors enjoy indirect access to the Saudi Arabia capital market through swaps. Though the discussion has been ongoing for years, no firm decision has been reached on allowing more direct forms of foreign participation. The kingdom is feeling a tiny bit of heat from Bahrain and the United Arab Emirates where markets have been liberalised and trade is booming.

“Economic activity, though, is picking up with sustained growth rates of close to four percent annually forecasted up to 2020.”

Analysts and assorted pundits are quite unanimous in their belief that the foot-dragging has its origin in the fears of King Abdullah bin Abdulaziz al Saud and his ministers about the possibly destabilising effects an opening of the market may bring. It is thought that big swings in stock prices could hurt the Saudi economy. The kingdom’s policymakers are also reluctant to change because of the market crash of 2006 that wiped out some $500bn in value, destroying the savings of countless families. Market volatility has been foremost on the minds of regulators ever since.

Still, the timing would seem just about right for a gradual opening of the Tadawul, the only stock market in Saudi Arabia listing 156 publically traded companies. After again taking a nosedive in 2008, the market has shown resilience of late with prices stabilising and gaining ground. Over 2013, the Tadawul benchmark index rose 25.5% but now seems to have hit a plateau.

Economic activity, though, is picking up with sustained growth rates of close to four percent annually forecasted up to 2020.

While in the Bahraini capital Manama for a finance conference, Saudi Fransi Capital Chief Executive Yasir Al-Rumayyan could barely hide his excitement: “2014 is going to be a big year,” he said, “it’s three things: It’s the regulators and their requirements; it’s the issuers and their willingness to come; and it’s the ability of the adviser to execute. I think this year, the regulator is very excited to get more companies in; issuers are coming in; and financial advisers want to close deals in every quarter and not just once a year.”

Mr Al-Rumayyan also expressed confidence in that in 2014, IPOs (Initial Public Offerings) should exceed in volume those issued in 2012 when seven companies went public and raised a combined total of $1.4bn. Saudi Fransi Capital is currently putting the finishing touches on the IPO of an as of yet undisclosed company that Mr Al Rumayyad expects will raise in excess of $210m.

However, the IPO generating most excitement among the kingdom’s investors is one being now prepared by the Saudi Finance Ministry for the National Commercial Bank – the country’s largest lending institution. Mr Al Rumayyan sees signs that the erstwhile very strict Capital Markets Authority is embracing a more hands-off approach, focusing instead on corporate disclosure requirements and due diligence while allowing the market more leeway in setting the price of newly introduced stocks.

Just last year, the regulatory authorities discouraged Astra Food, a Saudi producer and distributor of foodstuffs, from going through with its IPO plans after it was found the company could not satisfactorily substantiate its financial performance projections.

With a series of IPOs now lined up for launch, the Saudi stock market looks for improved liquidity, though this is not necessarily one of the regulator’s priorities. “What is important to the CMA is the development of more stable market conditions. This may be attained by attracting a class of perhaps slightly more sophisticated investors to the market. Against this light, the opening up of the Tadawul to foreign investors would seem to make sense,” says Anas Al Sheikh of Clifford Chance, the first law firm to operate a partnership in the kingdom.

Mr Al Sheikh also expects movement on the Mergers and Acquisitions front, especially in the insurance sector where he anticipates consolidation of various market participants. Meanwhile, foreign investors must make do with swaps. However, nearly all stakeholders in the Saudi stock market agree that their time will come – probably sooner than later.