Saudi accelerates capital markets reform

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Stock market opens up further; influx of foreign money still capped.

By Olivier Holmey

Saudi Arabia’s Capital Markets Authority is set to ease foreign investor access to the country’s stock exchange with a series of new reforms. Market participants are excited about the new rules, after a previous wave of reforms implemented last year attracted few foreign funds to the country.

Mohammed Al-Jadaan, chairman of the CMA, told a Euromoney conference in Riyadh in May that it will expand the pool of foreign funds eligible to become Qualified Foreign Investors (QFIs), a status that allows them to invest directly in Saudi stocks. QFIs will also be able to hold more shares under the new rules. 

Funds were previously required to have $5 billion of assets under management to apply for QFI status. Now they will need just $1 billion QFIs previously were allowed to hold just 5% of any individual stock, but they can now hold twice that amount. Combined, they can hold 49% of the stock market’s overall capitalization, up from 10% previously.

Extensions

Mohammed Al-Jadaan 160x186
Mohammed Al-Jadaan

Securities lending and covered short selling will also be introduced, and settlement times will be extended to two days (T+2) from execution. Before, they had to be settled on the same day.

Al-Jadaan told delegates at Euromoney’s Saudi Arabia conference that these changes, which will be effective by mid-2017, would "bring the capital markets of Saudi Arabia very close to the world stage". Investor reactions have been overwhelmingly positive. 

Johan Hattingh, CEO at Ashmore Investment Saudi Arabia, welcomes the development and says that it will improve conditions for foreign equity funds operating in the kingdom.

Saudi regulators are making a clear push for reform, says Hattingh, adding that, unrelated to these latest announcements, the CMA wrote to Ashmore in April, asking which products the investment house wanted to see introduced in the market. It is highly unusual for regulators to be so proactive, says Hattingh, adding that usually it is market participants that have to approach regulators, begging for change. 

Abdellah Sbai, head of the management division of Abu Dhabi-based Waha Capital, also says the changes are significant, though his firm will not immediately look to increase its investments in Saudi Arabia, as it considers the kingdom’s stocks overvalued.  

This latest, largely unexpected, move comes a little under a year after the CMA introduced a first series of reforms aimed at liberalizing the Saudi Stock Exchange. Implemented in June 2015, those changes allowed foreign investors for the first time to buy Saudi shares directly, in secondary trading. 

Adel Al-Ghamdi, the enthusiastic head of the Saudi Stock Exchange, travelled to Singapore, London and New York to promote the moves among investors and journalists. 

Expectations

But a year on, Al-Ghamdi has now gone, and observers say foreign funds did not flood into Saudi Arabia as hoped. By the end of 2015, only 17 foreign investors had registered as QFIs. "There was a big expectation at the beginning of the year," says Sbai. "Some played the fact the opening of the market would bring a lot of liquidity. That boosted the stock at the start of 2015 but then there wasn’t the inflow expected."

The ownership caps, short settlement periods and high AuM requirements deterred many equity funds from entering the kingdom. Whether the latest moves are an attempt to rectify that situation, or are simply the continuation of the CMA’s gradual drive towards openness, is unclear. 

In any case, many restrictions remain. Foreign ownership on the Tadawul, as the Saudi exchange is also known, is still capped. And QFIs still cannot invest in the primary market, which precludes them from participating in IPOs or in primary block trades and rights issues.

Raising the bar

The CMA says the latest rules will be implemented with the aim of "raising the bar in relation to investing strategies, equity research and market valuations, and would expand and strengthen the growth of the Saudi capital market, and enhance the expertise of local institutions and investors, thus providing stability of market prices and support growth".

The CMA has consistently said sophistication and transparency, above simply attracting foreign money, were the reasons for allowing large, experienced foreign investors in. Foreign funds were historically banned from the Saudi exchange because of fears of an influx of hot money into a bourse dominated by retail investors. 

The market was widely seen as a tool for redistributing wealth among the wider Saudi population.

Industry insiders across the Gulf region are paying close attention to changes on the Saudi exchange, as it is the largest in the region. Salmaan Jaffery, chief business development officer at the Dubai International Financial Centre, who recently travelled to Riyadh, is impressed with the pace of the CMA’s reforms. "It is moving very, very rapidly," he says.