For the first time, Saudi Arabia has opened its markets to foreign investors in hopes that in can attract more international investments in the country. Saudi Arabia has experienced solid growth over the last decade due to hundreds of billions of dollars in revenue from the sale of oil and is attempting to maintain its local spending plan after crude prices have tumbled. The opening of the stock exchange can play a role in reducing its dependence on oil as a driver in its economy and also aid in its future economic growth.
According to the latest data from the World Federation of Exchanges, Saudi Arabia is the largest stock market in the Middle East, and the value of the companies on the exchange makes it larger than the main markets in Russia and Mexico. In addition, the Capital Market Authority, which oversees the stock market, stated that it wanted to grow its institutional investor base in order to promote Saudi Arabia’s market stability and reduce volatility in the economy.
Retail is a rising sector in Saudi Arabia due to high consumer spending, and subsidized gas has created a highly competitive petrochemical sector. In addition, the banking sector appears to be profitable, with several bank customers choosing Sharia-compliant, interest-free deposits. Saudi Arabia has a fairly strong economy, and its oil profits from the last few years have been used to clear debt and build its foreign reserves. Other Arab countries, like Qatar, Kuwait, and the United Arab Emirates, could stand to benefit from the opening their own stock exchanges, as it would draw investor attention to the region. The Gulf countries could stand to heavily benefit from the attention, as their oil-dependent economies have suffered from the high supply and low demand for oil.
There have been several challenges that have prevented the stock market from growing rapidly thus far. For instance, there have been valuation concerns and a lack of clarity over the new rules. Prior to opening the market to foreign investors, foreigners were only able to indirectly buy shares and would only get the economic benefits. The regulations only allow institutions that manage $5 billion of assets (or $3 billion with exceptions) and a five- year investment record to invest in the market. In addition, no single investor can own more than 5% of a company, and overall foreign ownership of that company cannot exceed 49%. In addition, overall, only 10% of equity in the stock exchange can be foreign-owned. Until the Saudi exchange becomes a part of a global benchmark, most of the inflow of investments will come from actively managed funds that can assess valuations prior to investing in the market. MSCI has stated that it would assess the market’s accessibility to foreigners before it considers adding to its emerging market basket. The majority of the emerging market players are not actively investing due to the stringent rules and regulations currently in place.