Saudi Arabia’s decision to open its stock market (Tadawul) to foreign investment is the first step in a program to bring the Saudi private sector to the highest international standards of governance and transparency. It presents an opportunity for investors to be part of the Arabian Gulf region’s most exciting growth story.
Saudi Arabia opened its stock market to foreign investors in June 2015. The Saudi market is the largest in the Middle East with an estimated value of over $500 billion.
Saudi Stock Exchange CEO Mr. Adel Al-Ghamdi says that opening the Saudi market to foreign investors is about more than tapping new sources of capital. Saudi Arabia is a central member of the G-20 and the World Trade Organization, and the Kingdom wants to ensure that its business community embraces the highest standards of international corporate governance. Al-Ghamdi describes the opening as part of it as a gradual process within “a much longer journey to transform the market.”
More than 160 companies are listed on the exchange, including strong international players such as Saudi Basic Industries Corporation (SABIC), among the top global chemicals producers, and Saudi Telecom Co. (STC), the Gulf’s largest telecommunications operator by market value.
Al-Ghamdi shared his thoughts about the transformation of the Saudi investment climate and its effects on Saudi business and the Saudi economy over the long term.
What is the total value of the Saudi stock market?
AL-GHAMDI: As of July 15, 2015, the total value of the Saudi stock market was approximately US $570bn. Clearly, the exact valuation is not static and will vary from day-to-day.
Why now? Why was the Saudi stock market opened to foreign investment this year?
Al-GHAMDI: The opening of the Saudi stock market to Qualified Foreign Investors [QFIs] has been discussed for a number of years, and the current framework is the culmination of a long period of preparation and consultation in order to ensure that the changes are introduced in the right way. The Saudi stock market currently sits as one of the leading emerging markets in the world, and new reforms are strengthening the investment environment and ensuring that the market is well-adapted for QFIs.
Opening the market to QFIs will be a gradual process. This is one part in a much longer journey in the transformation of the market. As the market improves and develops, the Saudi Stock Exchange is looking to take its rightful position in global markets and also act as a means to develop, promote and fuel the vibrant Saudi economy and its future prospects as a whole.
What does Saudi Arabia hope to achieve by allowing foreign investors to buy Saudi stocks?
AL-GHAMDI: Opening the market to QFIs is primarily designed to help make the market more sophisticated and stable.
Enabling international institutions to have equity stakes in listed companies will build shareholder activism, which in turn will promote better reporting, investor relations, and corporate governance practices amongst our issuers. In addition, we expect the growing sophistication of market stakeholders to help foster the development of advanced market frameworks and infrastructure, and broader and more sophisticated research coverage of our listed companies. For Saudi Arabia itself, increased market sophistication will contribute to economic diversification and help spur economic growth.
The introduction, in a controlled manner, of direct investment by qualified foreign institutions will also help to improve overall stability in the market. This will come alongside moves to encourage a rebalancing among local investors from retail investment – which currently accounts for around a third of total market capitalization but 90% of monthly trading activity – to institutional investment.
Is it difficult for foreign investors to achieve QFI status?
AL-GHAMDI: Our aim is to attract high calibre and experienced institutional investors, not just greater volumes of investment. Indeed, it is important to note that the primary aim of the QFI framework was not to attract capital. Companies listed on the exchange are already well-capitalised. The aim of the framework is to bring in the sort of experienced international institutional investors that will be able to play a role in driving up levels of corporate governance and transparency, improve market knowledge and research and help to reduce volatility on the Exchange.
How many QFIs do you expect to have registered by the end of 2015?
AL-GHAMDI: At this early stage, it is difficult to make concrete predictions. More important than the numbers of QFIs that sign up is whether or not we find in several years’ time that their involvement in the market is beginning to have an impact in a way that meets the goals of the programme – enhancing the sophistication and stability of the market.
What would the benefits for Saudi Arabia be of inclusion on the MSCI Emerging Markets index? Why does Saudi Arabia want to be included?
AL-GHAMDI: The MSCI Emerging Markets Index is tracked by global funds with $1.7 trillion in assets. Inclusion in this index would allow the Saudi market to gain exposure to the global economy’s most professional investors, which would help to advance the broader aims of the framework—greater sophistication, more transparency, and better governance.
Do you still expect Saudi Arabia to be included on the MSCI in 2017?
AL-GHAMDI: The timeline for opening up the Saudi stock market is deliberately designed to be gradual and measured. The official opening in June to QFIs was a controlled first step along the road to raising the level of foreign participation, allowing those investors who met the established qualifications to apply for a license. Entry into the MSCI Emerging Markets Index is another important step, which should come over time, but we do not have a finite timescale at this stage.
Do you think it is important that Saudi Arabia’s corporate culture embraces international corporate governance best practice? Why?
AL-GHAMDI: Yes. Indeed, this is one of the primary motivating factors behind opening the market. A number of our issuers already adhere to international corporate governance best practices, and we have already seen improvements in this area in recent years, but we expect that opening the Saudi market to QFIs (with the corresponding reforms and enhanced shareholder activism) to drive further improvements in corporate governance and improve overall transparency in the market. This is important because a more sophisticated market will help drive regional economic growth and development.