Emerging Markets

Saudi Stock Exchange Opens to International Investors

In a bid to diversify its economy, Saudi Arabia has granted limited access to its stock market for qualified foreign

The Saudi Stock Exchange, Tadawul, yesterday opened its doors to international investors. The decision allows qualified foreign investors (QFIs) – namely, those institutional investors with a minimum of US$5 billion in assets under management and at least a five-year track record– to access the US$580 billion Saudi stock market, by far the biggest in the Gulf.

The decision allows qualified foreign investors to access the US$580 billion Saudi stock market.

Saudi Arabia represents approximately 50 percent of the US$1.6 trillion Gulf economy and is the 19th largest in the world. While GDP growth has recently been downgraded, the projections remain at 2.5 percent for 2015. The stock market itself has seen significant fluctuations in recent months, rebounding by 15% from a 23% drop in late 2014, widely believed to be closely correlated with the struggling price of oil. However, the market valuations remain high.

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Access

Foreign investors are now permitted to directly buy Saudi stocks, which could hitherto only be accessed via so-called participatory notes and exchange-traded funds.

The decision may be seen as the next step in a gradual opening up of the broader Saudi economy to private investment; the motivating driver for which is the desire to reduce reliance on oil income.

But the opening up of the Saudi Stock Exchange is not without restriction. Firstly, there are a number of caps. According to Bloomberg, the new scheme allows foreigners to own as much as 49 percent of a single stock. Any given QFI may hold up to 5 percent of a single equity and a 20 percent ceiling in any one stock applies to all QFIs. In total, QFI holdings will not exceed 10 percent of the market.

Secondly, real estate interests in the holy cities of Medina and Mecca are not permitted for non-Muslim investors. This extends to investment in companies with assets in these locales.

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Indeed, six companies are completely off-limits: Makkah Construction & Development Co., Jabal Omar Development Co., Medina-based Taiba Holding Co., Knowledge Economic City Co., Saudi Real Estate Co. and The National Shipping Co. of Saudi Arabia.

However, chief executive officer of the stock exchange, Adel Al-Ghamdi, has indicated that the rules will evolve as time goes by.

The Rationale

The decision may be seen as the next step in a gradual opening up of the broader Saudi economy to private investment; the motivating driver for which is the desire to reduce reliance on oil income. Controlling the world’s second largest hydrocarbon reserves, approximately 75% of budget revenues and 90% of export earnings come from the oil industry. This makes Saudi Arabia the least diversified economy in the Cooperation Council for the Arab States of the Gulf (GCC).

And with the slump in oil prices, the Kingdom’s foreign reserves have been rapidly dwindling, exacerbated by Saudi’s involvement in the neighbouring conflict zones of Yemen and Syria.

By allowing internatinal innvestors into the market, the quality of corporate governance at Saudi companies will be lifted.

A point that has been more explicitly emphasised is that by allowing QFIs into the market, the quality of corporate governance at Saudi companies will be lifted. This will be achieved via their participation in general assembly meetings and the ability to nominate representatives to boards.

Chief executive, Adel Al-Ghamdi, commented: “We are excited to welcome foreign investors to our exchange. This is an important and considered next step in a long journey that will continue the development of the exchange, enhance governance among listed businesses and improve research and knowledge in the market.”

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