Open market in Saudi Arabia promises to shake up investing world

It was the announcement for which many global investors had been waiting years: the kingdom of Saudi Arabia will from next year open its stock markets to foreign ownership.

It is hard to overstate the importance of that news, which was made public with little fanfare towards the end of the holy month of Ramadan. That is how Saudi does things – low-key, discreetly and after much deliberation.

But it promises to be an investment event of huge significance for the Middle East, and for the world. The world’s largest oil producer, and the biggest economy in the region, will be open for business to the big global investment funds that chase returns around the world.

It is a market of around US$530 billion, with the share registers of some of the biggest corporates in the world up for grabs. Companies such as Sabic (petrochemicals), Almarai (food products) and Al Rahji (Islamic banking) will welcome the likes of Goldman Sachs, Fidelity and Franklin Templeton. You can almost hear the investors salivating in London, New York, Frankfurt and Hong Kong.

Global markets have been waiting for the opportunity since 2008, when Saudi first hinted that it was prepared to entertain the idea of foreign investors by allowing institutions to buy synthetic instruments that gave them an economic but not an equity stake in some of the bigger companies on the Tadawul, the Riyadh stock exchange.

Some international investors went for it but a lot more stayed away. The rules that guide investment principles among many of the big global institutions are quite specific about ownership, and many would-be investors found they could not square the investment opportunity back then with their own guidelines.

So, on the face of it, the full opening up sometime next year is a big thing. But investors who are already on their marks to pump money into Saudi should be aware of a few things before they part with their money quite so readily.

First, the details are still being ironed out by the kingdom’s regulator, the Capital Markets Authority (CMA) working with the central bank equivalent, the Saudi Arabian Monetary Agency, so a raft of technical but important items are yet to be decided.

What proportion of a Saudi corporate can be owned by foreigners? Will institutions have to set up in the kingdom to be eligible to invest there? Will they have to seek approval from the authorities before they can trade in Saudi equities, as the Chinese insist? Can dividends be repatriated? Will the Tadawul be included in the rankings of “emerging” markets, the most accessible for foreigners, or will they have “frontier” status, like Qatar and the UAE until earlier this year?

All these questions will have to be answered before foreigners can begin investing in any meaningful way.

But perhaps the most important question, and the most difficult to answer, is: do the Saudis mean it? Are they really prepared to give foreign investors the same treatment as Saudis in the kingdom’s financial markets.

In at least one case, the signs are not auspicious. Since 2009, when the Al Gosaibi business empire effectively went bust, international creditors have been struggling to get back any of the loans they made to the two businesses, estimated at around $9bn.

The process has been hampered by the fact that Saudi banks – owed around one third of the total – have refused to join common cause with the others, including banks from the UAE and the rest of the GCC region, as well as all the big names of international finance.

The Saudi banks refused to send representatives to a meeting of creditors in May, and are trying to take ownership of assets involved in the dispute directly through legal action in the Saudi courts. The Al Gosaibis are fighting those legal actions.

The Saudi banks are, of course, playing by Saudi law, as they have every right to do. But they are not playing by the conventions of international banking, which insists on an equal playing field for all creditors in such circumstances.

If the Saudis really want to demonstrate to the world that they are open for business, they should tell their banks to join the line of creditors waiting for something back from Al Gosaibi.

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