Saudi Regulator Set to Open Up Debt Market to Foreign Investors

Saudi regulators increasingly loosen restrictions to let foreign ‎investors access capital markets as energy revenues shrink.

A year after Saudi Arabia opened up its stock market to foreign investors, the ‎financial regulator in the oil-rich kingdom, Capital Market Authority (CMA), announced Wednesday new amendments to its regulations to allow foreign institutional ‎investments in the exchange-listed debt instruments for the first time. The Saudi ‎regulator further eased restrictions on foreign investments after the new amendments ‎changed references to “shares” in the rules into “securities”, according to a ‎Thomson Reuters report.‎

The expected step came as part of reforms intended to attract more foreign capital ‎into its markets as the country tries to tackle a widening budget deficit caused by ‎cheap oil.‎

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Regarding the suggested amendments, the regulator said in its statement: ‎‏”‏Qualified Foreign Financial Institutions ‎‎(QFIs) are allowed to invest in the debt market. In addition, the minimum limit for the ‎assets under management is decreased to 3.75 Billion Riyals as opposed to 18.75 ‎Billion Riyals. Furthermore, the types of the financial institutions are increased to ‎include government funds and university endowments and other entities approved ‎by CMA.”

The CMA has published its amendments seeking public comment during the specified ‎period of 30 calendar days starting from June 20. It has previously said that the final reforms will be ‎implemented by the middle of 2017. ‎

Further limitations

In addition, investments of QFIs shall be subject to the following limitations: ‎

        Each QFI may not own 10% or more of the shares of any issuer whose ‎shares are listed;‎

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        The maximum proportion of the shares of any issuer whose shares are listed ‎that may be owned by all foreign investors (in all categories, whether ‎residents or non-residents) in aggregate is 49%;‎

        Other legislative limitations on foreign ownership, in addition to the limitations ‎set forth or any instructions issued by regulator to which these companies are ‎subject.‎

Access to debt instruments could increase the interest of foreign asset managers in ‎Riyadh’s securities exchange. Saudi Arabia has already eased barriers to foreign ‎investments to give them “restricted access” to its $420 billion stock market, but the ‎demand remains subdued as foreign traders and financial institutions watch from the ‎sidelines and wait for reforms to come into effect. Also, concerns about trading ‎restrictions, liquidity and economic slowdown caused by low oil prices have so far ‎limited flows of foreign money into the exchange.‎

Reforms to cut deficits

Saudi Arabia and its oil-exporting neighbours in the Arabian Gulf region, whose ‎finances were hit by low oil prices, are increasingly looking to access capital markets to ‎compensate for shrinking oil revenues.‎

Although the kingdom currently has a limited debt market with only about half a dozen listed bonds and sukuk issued at the end ‎of last year, authorities have said that they will encourage more issuance and trading ‎of Saudi corporate debt. Saudi Arabia is also weighing a sale of at least $15 billion ‎bonds in July, after already borrowing $10 billion from a ‎consortium of global banks in April.‎

Furthermore, the Kingdom’s Vision 2030 program is also looking to increase ‎debt-to-GDP ratio from basically near zero levels now to 50 percent in the scope of ‎five years,‎ which should revive the national debt markets.

In its report on Vision 2030, Riyadh-based investment ‎firm Jadwa warned that Saudi Arabia’s fiscal buffers would be heavily eroded in ‎coming years if action is not taken to reduce the country’s dependence on oil. Even ‎with a recovery in energy prices and higher production levels, as modelled in the ‎report, the Saudi budget would come under further pressure with increased deficits.‎

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