Saudi Arabia prepares to open market to foreigners

May 11, 2015
<p>Largest market in the Middle East will open to non-domestic investors in June</p>

Saudi Arabia last week revealed the final rules for foreign investors looking to move into the kingdom’s $590 bn stock market.

While the opening up of the Saudi bourse, or Tadawul, has been long-awaited, only qualified foreign investors (QFIs) with more than $5 bn in assets under management will be able to take advantage of the June 15 opening.

Other restrictions also apply, with foreign ownership in any one company – from QFIs, swap owners or foreign residents – capped at 49 percent, while a single QFI will be able to own a maximum 5 percent of any one company.

Across the Saudi market as a whole, the foreign ownership limit is set at 10 percent, with emerging markets investment bank Arqaam Capital estimating foreign inflows in the region of $40 bn over the next five years – a figure equivalent to around 10 percent of the total market.

Commenting on why Saudi Arabia has chosen to open up the market now, Arqaam notes that the Saudi ‘Capital Market Authority explicitly states that part of the reason it is allowing QFIs is to qualify for inclusion in the MSCI Emerging Market Index.’

Another factor in the move is, of course, the price of oil, says Oliver Schutzmann, CEO of Dubai-based IR consultancy Iridium. Since crude prices have dropped, ‘there are some question marks around the spending capabilities of the [Saudi] government,’ he says. ‘Companies have to find a way to fund their own businesses sooner or later.’ He adds that this is an issue that affects the wider Gulf region as well as Saudi Arabia.

When it comes to the opening of the Saudi bourse and the impact on the wider region, Schutzmann says there are two schools of thought. Some expect new investors buying Saudi companies to find attractive options in neighboring markets, he explains. ‘Then there’s the second camp, which is actually a bit worried because the Saudi market is so big and the liquidity is so high that investors might be inclined to pull out of other markets to look at opportunities in Saudi,’ he says.

‘The question is: will Saudi take over as the financial center of the Middle East? That’s where people’s thoughts are going. Is it possible for Dubai or even Abu Dhabi to become to Saudi what Bahrain is to the UAE or Qatar today?’

Boosting Saudi IR

When it comes to the kingdom’s fledgling IR community, Schutzmann says the move can only be a good thing as investor relations professionals gain experience of the demands of the institutional investor: the kind ‒ and depth ‒ of information that’s required, for example. Some Saudi firms do have ‘very advanced’ IR programs, he says, citing dairy giant Almarai, telecom firm STC and miner Ma’aden as examples, but that’s largely because they have already been exposed to international investors. This isn’t the case for the majority of the market.

‘There needs to be a lot of catching up in terms of the quality and depth of information and accessibility to senior management,’ he continues. ‘A lot of companies need to accept that when you’re publicly listed, the shareholders are the actual owners of your [business], and I’m not sure if that has trickled through everywhere yet.’

For Schutzmann, this change has to come from the top. ‘The best advice I would give to the board would be to allocate a specific budget to investor relations, because a lot of companies don’t have that,’ he points out. ‘Then the management team needs to use that budget to build the right content platform, ensure it has access to the right type of investors and that it spends its resources – both time and financial resources – wisely. Finally, companies need to get the IRO to make it all work based on the experience that person brings to the table.’

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