Stronger capital markets a key target for Saudi Arabia during G20 presidency

Capital market reforms have encouraged more investment in Saudi-domiciled funds

An attendee finds out event information on a tablet carried by a robot on the opening day of the Future Investment Initiative (FII) forum at the Ritz Carlton hotel in Riyadh, Saudi Arabia, on Tuesday, Oct. 29, 2019. Central banks have run out of firepower to fight the next economic downturn, according to global finance chiefs gathered at an investment forum in Saudi Arabia on Tuesday. Photographer: Faisal Al Nasser/Bloomberg
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The global growth in capital markets over the past decade has been far from balanced. On the one hand, some markets have witnessed the accumulation of big pools of private capital, led by sovereign wealth funds, private equity and family offices, in others, insufficient access to capital has been a permanent feature.

As Saudi Arabia takes over the G20 presidency at the start of a new decade, it is placing the development of domestic capital markets at the centre of its presidency agenda, with a particular focus on an enabling ecosystem for financial inclusion.

When Mohammed El-Kuwaiz, chairman of the Saudi Capital Markets Authority, addressed delegates at the recent G20 Conference on domestic capital markets development in Riyadh, he had a simple, yet powerful, message: strengthening of capital markets and the development of local currency debt and bond markets is one of the kingdom's key priorities as part of its commitment to global economic prosperity.

His message follows a successful year for Saudi Arabia’s capital markets. Last year saw the number of investors in Saudi-domiciled closed-ended funds increase by 49 per cent and in Saudi index funds by 6 per cent compared to 2018.

Foreign cash flow in the kingdom's capital market reached 76 billion Saudi riyals (Dh74.4bn) and over 800 licences for foreign investment were granted, up from 259 in 2015.

Since 2015, Saudi Arabia has experienced broad and compelling market reforms as part of wider structural reforms that have led to fiscal consolidation, economic diversification and an increase in private sector-led job creation.

Yet there are two very important factors that have underpinned such changes.

The first is that change has been championed from above with a leadership committed to developing an inclusive economic growth model. Indeed, changes have been led by a political establishment that has showed a strong appetite for a more holistic approach to reforms and for an enabling environment that accelerates growth and creates financial stability.

The vision to champion from above and the will to carry through with reforms is refreshing in a region where changes have often been slow and uneven.

The second factor is that Saudi Arabia has understood that long-term capital needs long-term regulation and policymaking. The kingdom's recent inclusion in the Financial Action Task Force, the first Arab country to do so, is a testament to its commitment to introducing further reforms to expand financial services and attract investors.

Saudi officials have very quickly understood that capital markets are the ultimate democratiser in terms of access to capital and that well-developed domestic capital markets can create the most inclusive form of growth.

But they have also very quickly understood that technology facilitates the development of such an enabling ecosystem by creating a well-functioning market infrastructure, by providing liquidity and market depth, and by helping to develop a domestic investor base.

That is why Saudi Arabia has showed that it is keen to utilise financial innovation while also acknowledging that countries need to tailor FinTech to their own circumstances.

For example, in the case of Saudi Arabia, there has been a focus on greater financial inclusion for the young and for women, with the latter likely to become a strong driving force for change.

FinTech can and must play a pivotal role in broadening and deepening domestic capital markets. This can be achieved via three channels: by helping to diversify the investor base, focusing more on disclosure and governance and by removing constrains on capital markets.

On the first point, we know that the existence of a narrow investor base has traditionally been a constraint in Saudi Arabia. FinTech can help diversify the investor base by, for example, opening the market to foreign investors and promoting the penetration of institutional investors – two categories that traditionally have been underrepresented in the kingdom.

It can also pursue bidirectional opening to international participants while preparing the domestic market for spillovers – i.e. introducing knowledge-sharing via FinTechs that is aligned to international standards.

On the second point, FinTech can introduce international market practices, has the scope to enhance operational independence and can help raise disclosure and accounting standards to international standards.

On the third point, FinTech will essentially build an ecosystem that allocates capital efficiently.

Yet Saudi officials also acknowledge that opening the market is just a tool whose success in achieving its goals chiefly depends on getting the sequence of reforms and market opening right.

What is clear is that Saudi Arabia is keen to utilise its leadership in the region to help create, grow and support those national champions that investors look for.

The kingdom fully understands that achieving that requires not only an enabling environment (financial stability as well as a predictable political and economic environment) but also by continuous engagement with listed companies, open market access, and by promoting systematic, robust and autonomous market forces.

Roxana Mohammadian-Molina is chief strategy officer and board member at London-based FinTech company Blend Network.