Saudi Arabia’s stock market regulator, the Capital Markets Authority, is in an invidious position. At the start of the year CMA officials tried in vain to warn naive retail investors about the dangers of piling into the under-researched, thinly traded speculative stocks that comprise nearly a quarter of the country’s public companies. They were ignored: dismissed as interfering, risk-averse bureaucrats. The market, driven by rising corporate profitability resulting from the high oil price, rose to absurd levels.
Who would be a regulator? When the crash it had warned about materialized, the CMA was blamed and explanations were demanded – why were investors not better protected, why had the stock market crashed?
That’s easy: too much liquidity was chasing too few quality stocks in a market lacking independent stock research or informed institutional investors buying and selling on value. Rather, the market was driven by unscrupulous manipulators and speculators. It’s the typical story of the emerging country stock market. But Saudi Arabia is not typical. Oil makes it different. It has a big economy, enjoying high growth and some large oil and non-oil related companies, as well as banks and infrastructure projects, all of which might raise equity capital through an efficient market.
Saudi Arabia could become one of the world’s biggest emerging stock markets. It has an industrial hinterland far more substantial than that of Dubai, where the vision of Sheikh Mohammed bin Rashid Al Maktoum to create the leading stock market between western Europe and east Asia is attracting increasing support from international firms. Morgan Stanley and Citigroup are among the recent arrivals there.
To fulfil Saudi Arabia’s potential and face down the regional competition, the CMA must take several key steps. Most important, it must catch in its nets the so-called hamour, the big fish – wealthy and well-connected Saudis who, during the stock market’s unrestrained rise, quickly mastered the dark arts of cornering obscure stocks, driving the price up and then dumping them at huge profit on ill-informed investors.
The good news is that CMA chairman Jammaz Abdullah Al-Suhaimi has the support of king Abdullah, to whom he reports directly, to track down and punish the wrongdoers no matter how highly placed they are in Saudi society. The CMA has closed down some operators and secured one or two big financial penalties – one as high as $40 million. But it must be supported in this campaign to the hilt, otherwise it will fail.
When it does pull in such big fines, it might be wise to divert these from the general budget into some kind of capital markets development fund, because, as well as casting out the criminals, the market still needs a lot of development.
The banks, the sole intermediaries to date, have seen no business rationale for producing research. Retail investors couldn’t understand it: the hamour have no interest in it. A capital market development fund might subsidize the cost of producing decent research until a critical mass of conventional institutional fund managers, the natural customer base, arises. The speed at which that happens partly depends on privatization, itself an urgent requirement for filling out the lists of quality stocks and ensuring greater private sector participation in the economy. Corporate pension funds will follow eventually. In the meantime, there is plenty of public money in Saudi Arabia that could be handed out to private sector asset managers.
It will be a long, tough battle to summon up a robust, functioning stock market, but it’s one worth fighting. Modern economies require strong banking systems and strong capital markets. The CMA, now assailed by politicians seeking a scapegoat for the market’s fall and demonized by the villainous market manipulators on their internet message boards, deserves support and encouragement.
If it succeeds, and the Saudi stock market infrastructure becomes sufficiently robust to accommodate free flows of international capital, foreign portfolio investors might one day soon participate in the economy that remains the fulcrum of the global oil market.
