Saudi Stock Exchange poised to allow foreign direct investment
The Saudi Stock Exchange – known as the Tadawul – is
expected to open up to direct foreign investment later this year, as part of a reform
agenda aimed at modernising the country’s securities markets.
Although no official statement has yet been made, market
participants in the region report that regulator the Capital Markets Authority
(CMA) is now seriously considering the practical steps needed to allow foreign
direct investment before the end of the year – a step that would unlock the latent
international interest in the Tadawul, according to some observers.
is making massive improvements to its whole financial system,” Tony Hallside,
regional director, Dubai, at investment management consultancy Investit told
theTRADEnews.com. "The CMA is becoming a world class regulator. A well
regulated financial industry is in their own domestic interest – it diversifies
their economy away from reliance on the petrol dollar and has massive growth
Until now, large foreign institutional investment firms wishing
to open offices in Saudi Arabia have had to form new subsidiary businesses in partnership with local Saudi companies. Direct investment has remained impossible, while reforms have been limited. Since 2008, foreign investors have been able to buy Saudi shares indirectly by means of total return swaps
via licenced brokers. For example, broking house Crédit Agricole Cheuvreux offers clients the ability to gain exposure to the Saudi Arabian equities market using proprietary notes (p-notes) – equity-linked certificates that allow foreign companies to invest in stocks in Saudi without being licensed to trade there – with local broker Fransi Tadawul, a subsidiary of Banque Saudi Fransi, in which Credit Agricole investment banking subsidiary Calyon has a 31.1% stake.
Cheuvreux’s p-notes are guaranteed by Calyon and are denominated in US dollars, thus avoiding local currency exposure. No pre-funding is required because the contracts settle in dollars via European central securities depository Euroclear. But the holder of the notes does not have any voting rights and details about the beneficiary have to be reported to the CMA, while short positions are not permitted at all.
“Regulators and exchanges in Saudi are taking input from
banks, index providers and market participants on foreign direct participation,” said Tarek
Lotfy, managing director of capital markets at Dubai-based fund management and
investment banking group Arqaam Capital. “I’d still expect to see gradual
change towards opening up the Saudi stock market – but any change in that
direction is most definitely a good thing.”
Chasing MSCI reclassification
One of the key indicators of progress could be the country’s
potential classification as an emerging market by MSCI, the global index provider, a step that would encourage many foreign institutional investors to participate at
the Tadawul, once direct investment is approved. Yet disputes between the index
provider and the Saudi authorities over market data have led to the failure of
earlier efforts to upgrade the country.
Qatar's inability to improve foreign ownership limitations and
continuing concerns over how the UAE deals with failed trades stopped MSCI from upgrading the two countries to emerging markets status last
year. But this does not dim the appeal of market
reform in Saudi and the other Gulf region markets to international investors,
according to Hallside.
global allocation of capital to the Gulf Cooperation Council (GCC) if its markets obtained emerging market
status would rise dramatically,” he said. “And of that, the majority is Saudi.
There's massive growth potential in the Saudi financial markets. Saudi Arabia
and several other GCC countries are an obvious choice for reallocation of
assets as fund managers pull resources away from Europe and the US due to the
difficult economic situation there."
Despite past disappointments, developments in Qatar,
which is seeking to build up its own position as a financial centre, may also
provide opportunities to international institutional investors. The choice of
the country to host the world cup in 2022 is prompting massive government spending on infrastructure
in Doha, the capital city, with positive
knock-on effects on the region’s economies.
billed as the greatest show on earth and it's prompting a supposed US$50
billion spend on infrastructure,” explained Hallside. “That can't help but flow
through to other countries in the region. It's an exciting time for the Middle
announcement by the Qatar Exchange on 17 January 2012 that a new market
for small and medium enterprises (SMEs) is now ready and able to receive
listing applications from Qatar and other GCC countries will also help. The
exchange is supported by the Qatar Development Bank, Silatech and Qatar
Enterprise, following approval by Qatar’s Supreme Council for
Economic Affairs and Investment.
Last year was undeniably a difficult year for many of the
region’s stock markets, caused in part by disruption relating to the Arab
Spring movement. Yet Hallside notes that market
sentiment since the new year has been relatively bullish. Sovereign wealth funds are investing inside
Saudi Arabia and virtually
every bank active in Saudi Arabia announced an increase in profits and revenues
for 2011, he insists. Stock markets in Iran and Iraq have also performed
surprisingly well in 2011, according to a new report from The
Economist Intelligence Unit – suggesting that the opportunities offered
by the Middle East region may feature more heavily on the radar of many institutional
investors in 2012.
“Securities market reform in Saudi Arabia and beyond is very
positive for us,” said Lotfy at Arqaam Capital. “Saudi is a hugely important
market by volume, size and market activity. The GCC countries are well placed –
they have escaped the worst of the financial crisis and have access to great
natural resources. I expect that 2012 will be a good year for the Gulf.”