When Saudi Arabia’s Capital Markets Authority (CMA) published draft rules on the types of foreign investors and funds that would be allowed to invest in the kingdom’s US$40 billion stock exchange late last year, potential investors had the clearest indication yet that the long-awaited opening of the Tadawul was imminent.
Those expectations may have been managed slightly by the death of King Abdullah early this year but economists and fund managers still expect market reform in Saudi Arabia to go ahead as planned, potentially allowing foreign investment in some of the kingdom’s biggest and wealthiest companies.
Most analysts now believe the slow but steady progress towards the market opening in Saudi Arabia will continue. The UAE and Qatar were upgraded to emerging market status by MSCI in 2014 – opening Dubai, Abu Dhabi and Doha’s exchanges to some US$17 billion of foreign funds – and Saudi companies will hope that market reform could put them on the radar, too.
“The stock market is on an unwavering path of opening up to foreign investors later this year. The rest of the economic modernisation and reform programme will continue under King Salman,” says John Sfakianakis, the Middle East director at Ashmore Group.
Imad Ghandour, the managing director at the private equity firm CedarBridge Partners – which has offices in the UAE, Saudi Arabia and Egypt – notes that the previous governor of the CMA, Mohammed El Sheikh, has received a cabinet post under King Salman.
“It is unclear yet if there will be a change in economic policy but … this highlights that the economic policy, including the opening of the capital market, is on top of the agenda,” Mr El Sheikh says.
But the CMA’s rules for what kind of investors will be allowed to put money into the Tadawul are strict, limiting investment to funds, banks or brokerage firms with assets under management of no less than $5bn.
They also restrict any one investor from holding more than 5 per cent of shares in a company, while a fund may not collectively own more than 20 per cent. The total foreign ownership of any Saudi company will stand at 49 per cent.
There is also an overall market value limitation, with total foreign investment in the Saudi market not allowed to exceed 10 per cent of the total market value.
“While the draft rules will continue to restrict all but the largest international financial institutions from participating directly on the Tadawul, even this limited opening represents a significant change in Saudi Arabia’s capital markets policy,” says a recent report on the CMA rules published by the law firm Latham Watkins.
Mr Ghandour is concerned the laws will restrict all but a few foreign investors from entering the Saudi market. “We still have to see under which transactional criteria will foreigners be allowed to invest in Tadawul. I have heard that the criteria are stringent and focusing on very well established funds and investors. We need to wait and see,” he says.
“I am hopeful that the new king will pursue and maybe accelerate his predecessor’s open economic policy.”
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