Sean Cronin: Saudi Arabia reforms stepped up to attract foreign investment

The reform of the Tadawul is taking place against a backdrop of unprecedented plans for economic diversification outlined in the Saudi Vision 2030 announced by the Saudi deputy crown prince Mohammed bin Salman last month.

RIYADH // Saudi Arabia took its first tentative steps towards opening the region’s biggest stock market to foreigners a year ago.

This week it raised the tempo to keep pace with other planned reforms sweeping through the kingdom.

New rules regulating the acti­vity of qualified financial investors (QFI) could attract more international capital to the US$400 billion Tadawul as the kingdom ushers in structural changes to recalibrate an economy that has been based around pumping oil for more than half a century.

The changes announced on Tuesday and expected to be implemented next summer include the introduction of covered short selling and stock lending as well as the removal of overall caps on foreign investment. The QFIs will be able to own as much as 49 per cent of a company’s capital. Individual QFIs will be able to own up to 10 per cent of a company’s share capital, compared with the current level of 5 per cent.

International asset managers attending a Euromoney conference in Riyadh offered qualified support for the reforms which are taking place as the kingdom moves towards listing part of the biggest jewel in its crown – Saudi Aramco.

Sheila Patel, the chief executive of international at Goldman Sachs Asset Management, said the reforms represented important steps towards making the kingdom and wider region more “investable”.

“Some of the changes are quite critical to the process of making this one of the markets that global investors can fit into their pantheon of asset allocation,” she said.

Richard Lacaille, the chief investment officer of State Street Global Advisors, said that it was admirable that progress was being made in introducing financial tools such as covered short selling but added it was essential that reforms were “complete and robust”.

Ensuring that minority shareholder rights were properly protected would also be an important consideration, he added.

The kingdom first allowed certain QFIs to invest directly in its stock exchange last June in a move widely expected to lead to a flood of investment by big foreign funds until then denied direct access to the market. While that did not materialise, officials say that boosting capitalisation was never really the point of a process intended to be more about governance than potentially destabilising floods of cash entering and leaving the market.

The reform of the Tadawul is taking place against a backdrop of unprecedented plans for economic diversification outlined in the Saudi Vision 2030 announced last month by the Saudi deputy crown prince Mohammed bin Salman.

While the stock exchange seeks to draw in more foreign funds, it also wants to encourage the listing of smaller companies and plans to launch a second market where they can list their shares.

Supporting small and medium-sized enterprises is a critical part of changing the structure of an economy dominated by one commodity in oil and one employer in the government.

Mohammed Al Jadaan, the chairman of the capital markets authority, said that rules relating to the size of com­panies eligible to list their shares on the secondary market were yet to be finalised.

“But it is likely to be significantly smaller than the listing threshold for the main market. The main market threshold is 100 million [Saudi riyals, Dh97.9m] – potentially the second market could be single digits. The disclosure requirements are also likely to be a lot less than the main market. I don’t think it will be compli­cated,” he said.

The Tadawul is also moving towards its own initial public offering in 2018. The chief executive Khalid Abdullah Al Hussan said on Tuesday that financial advisers for the share sale would be announced within days.

The changes under way in the Saudi market may also affect other bourses in the region moving at different speeds towards improved governance as recognised by index compilers such as MSCI.

Inclusion in such indexes increases the visibility of regional companies to foreign institutions seeking both returns and transparency.

The fragmented nature of regional stock exchanges today seems even more pronounced from the perspective of an international investor, at a time of global market consolidation.​

The idea of a single regional market listing stocks from ­Dubai to Dammam appears as much of a pipe dream as it has ever been.

But there is an opportunity for Saudi Arabia to become the “de facto” regional market drawing in new listings from its neighbours and even beyond the region without the need for a formal merger, says Mohammed El Kuwaiz, the chief executive of Derayah Financial, a Saudi investment firm.

“You don’t need much to play the role of a super-regional exchange,” he says. “There is nothing to prohibit Saudi Arabia from playing this role and make the Tadawul the regional hub.”

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