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Security outside diplomatic
compound in Riyadh: for the
first time, expatriates are
seriously concerned for their
personal safety |
IT HAS BEEN a long time coming and there have been moments when some bankers feared it might not happen at all. But as Saudi Arabia struggles with defeating terrorism and rebuilding a fragile relationship with the US, once its strongest western ally, the modernizers among the country's ruling elite have at last won an important victory.
The plans to revolutionize Saudi Arabia's financial sector, creating debt and equity markets operated to the highest international standards and allowing in international investment banks for the first time in many years, have finally struggled through the kingdom's bureaucratic wringer.
Now it remains to be seen how many foreign investors and bankers will be keen to take up the Saudi invitation, given recent terrorist killings of foreign workers.
Saudi Arabia might begin to reap the rewards later this year. Riyadh bankers report that a series of IPOs is planned for the next nine months. These include the privatization of insurance company NCCI and the flotation of shares in new insurance companies and the Saudi/UAE joint venture operating the second mobile phone licence. Several private companies are also planning to raise debt or equity from the market for the first time.
The final piece in the jigsaw was the appointment in early July of Jammaz Al-Suhaimi, a former deputy governor of the central bank, the Saudi Arabian Monetary Agency (Sama), as chairman of the regulators, the Capital Markets Authority.
The CMA appointment was of great significance. Riyadh bankers feel that Suhaimi, whom they see as a man of great integrity, played the key role in drafting the regulations, was responsible for putting in place the right team of advisers and has been methodical and thorough in driving through change. Any other choice would have undermined the credibility of the market.
Beshr Bakheet, managing partner of Bakheet Financial Advisers, who now plans to divest some of the shares in his company through a private placement and apply for an investment banking licence under the new law, says that the "choice of a regulatory committee chaired by Suhaimi has definitely given confidence to market players because they can see that there is a professional and experienced team in charge".
The impact of the reforms goes far beyond the financial sector. Suhaimi, in an interview with Euromoney, says the creation of a thriving capital market will play "an important role in creating sustained economic development. This role will grow in importance as the range and depth of financial instruments available increases."
He believes that the "depth of the market will increase as liquidity grows, while more companies will issue securities, attracting a wider range of investors to meet their financial needs".
In addition the financial sector will become "more sophisticated as the capital market facilitates the introduction of new financial instruments. The role of the CMA will be to stimulate this process of deepening and sophistication through appropriate regulations and specific initiatives."
Suhaimi is admired for the firm, professional and fair way he has regulated the kingdom's domestic financial sector during his time at the central bank. Both local and international bankers believed he was the outstanding candidate to head the CMA.
But, the longer it took to announce the new chairman – the decision on the membership and chairmanship of the board should have been made at the start of the year – the more fears grew that a less highly respected figure might get the job.
Sighs of relief
The CMA chairman now says he never had any doubts that he would be appointed. But bankers in Riyadh and Jeddah breathed sighs of relief when Suhaimi was finally confirmed in the post.
However the delay in finalizing the leadership of the CMA has been a mixed blessing. On the positive side, the equity market continues to boom as Saudi investors seek to place more of their money in the kingdom – Saudi shares are up by a further 40% already this year after rising by almost 80% in 2003.
On the negative side, the new system is being introduced at an extremely difficult time. A series of attacks on residential compounds – the most recent of which took place in the eastern city of Al Khobar, in which 31 were killed including 19 foreign workers – has now been followed by a new terrorist strategy of targeting and killing individual western executives working for Saudi companies.
These attacks have alarmed the expatriate community and their concern has hardly been eased by the statements of Al Qaeda fundamentalist terrorists that they intend to stampede western "infidels" out of the kingdom. Al Qaeda makes no secret of its ultimate aim of overthrowing the House of Saud.
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Students at King Faisal
University: overhauling the
capital markets will encourage
good companies and create jobs |
Security fears
Assessing the impact of the terror campaign will be impossible until the autumn when expatriate workers, who traditionally take a long summer break, return. But there are already reports that enrolments at the international schools are down significantly as many expatriates relocate their families elsewhere in the Gulf or leave altogether.
It is equally difficult to assess the impact on government policy. Decision making by the senior members of the House of Saud is a secretive matter and few in the kingdom – let alone outsiders – have much understanding of what they are thinking.
How they balance conflicting pressures will determine their long-term prospects. On one side there is considerable pressure from western governments – backed by bankers and most businessmen in the kingdom – for political and economic reform. This would include some redistribution of wealth, more job creation and an education system for boys and girls that is less focused on religion and more directed to vocational training.
Businesses have already started to sponsor training schemes. But enthusiasm for offering jobs to locals rather than cheaper and more efficient expatriates is more notable in principle than in practice.
On the other side are the pressures on the ruling family to maintain the historical connection with the Wahhabi clerical establishment, which remains a powerful obstacle to change and is able to prey on conservatives' fear that reform will threaten the state's stability.