Saudi Arabia gives green light to ease foreign ownership restrictions

Barriers removed on one of the world’s most-restricted major stock exchanges as the government pursues a $130bn spending plan to boost non-oil industries.

The Riyadh skyline. The Saudi Arabian economy has expanded at an average of 6.4 per cent in the past four years. Ali Jarekji / Reuters

Foreign investors are poised to enter Saudi Arabia’s US$531 billion stock market after the government gave the go-ahead for foreign ownership restrictions to be eased.

The kingdom’s cabinet had allowed foreign financial institutions to buy and sell stocks directly on the Tadawul All Share Index, the official news agency, SPA, said yesterday.

The institutions would be able to invest in shares during the first half of next year, the Capital Market Authority said in a separate statement. The kingdom’s benchmark index rallied in response to close up 2.8 per cent.

“These announcements have been long-awaited and it is likely that they will trigger a surge of foreign inflows to the Saudi market,” said Matthieu Belondrade, the head of global emerging markets equities at Natixis Asset Management.

Despite being the largest economy in the Middle East and home to major blue chip companies such as Saudi Arabia Basic Industries and Kingdom Holding, the Saudi Arabian bourse has remained off limits to most foreigners, unlike neighbouring UAE and Qatar, where overseas investors are allowed greater participation. Only about 1 per cent of stocks on the Saudi market are foreign-owned.

Speculation that the government could open the door to overseas buyers has risen since 2008, when foreigners were given permission to buy and sell shares via swap agreements with authorised companies. Viewed as a testing ground for further relaxation, the move was shunned by many investors as it required them to trade stocks through intermediaries and excluded some of the benefits of share ownership, such as voting rights.

“The Saudi government has been planning this all along,” said Muhammad Anum Saleem, the senior associate at Dhabaan & Partners, a law firm in Riyadh. “The government does reform at its own pace and by opening up now it is able to take advantage of corporate governance improvements worldwide.”

Details for the participation of foreign investors were not disclosed yesterday but could be released as early August, officials said.

Even if foreign ownership rules were only relaxed by 10 per cent, the market could still entice up to $50bn in foreign capital to the market, said Salah Shamma, the co-head of Mena equities at Franklin Templeton Middle East, the private equity firm.

It could also have wider benefits for other regional bourses, including the UAE and Qatar, he said. Both were upgraded by the index provider MSCI from frontier to emerging market status last month, an index which is tracked by an estimated $1.5 trillion in global funds.

“Our markets are dominated by retail investors, and more institutional investors will help to boost trade, volumes and liquidity and bring down transaction costs through improvements in scale,” Mr Shamma said.

MSCI said it would wait for the changes to be introduced before consulting investors about adding the kingdom to its broader stock indexes, Reuters reported yesterday, citing Sebastien Lieblich, the executive director in the index research team at MSCI.

Most countries normally join MSCI’s frontier markets before graduating to the emerging markets index. But the large size of the Saudi market means it may be more suitable for the emerging markets index.

“If Saudi Arabia was to join the MSCI Emerging Markets, it would get a weighting of between 4 and 5 per cent, similar to that of Russia,” said Mr Belondrade.

Still, other observers cautioned that Saudi was likely to follow in the footsteps of China, another emerging market giant that has so far only partially eased foreign ownership restrictions.

“This will not be a big bang, but a gradual phase-in,” said Jahangir Aka, the managing director at SEI Investments Middle East, a financial services company. “They will not want hedge funds coming in and out willy-nilly, but are likely to look for rules that encourage foreign investors for the long term.”

Follow The National's Business section on Twitter