The last year has been difficult for Gulf stock markets. The pressure of uprisings in the Middle East as well as Europe’s worsening debt crisis have taken a heavy toll. Dubai, in particular, has demonstrated the weakened state of stock markets in the region; its benchmark index plummeted to a six year low in 2011.
Yet despite these pressures and forecasts that in 2012 Arab stock markets (bar Saudi Arabia) will continue their downward trend, Saudi Arabia’s market, the Tadawal, gained nearly $12 billion in market capitalization during the first weeks of January. So significant was this increase that it offset the losses in all other Arab stock exchanges and maintained the region’s combined market capitalization unchanged at $879 billion.
The Saudi Stock Exchange is the largest securities exchange in the Middle EastIt is unlikely that the global economic situation will improve in the near future, to say nothing about the stability of transitioning governments in the Middle East and North Africa. If the stock markets of the Arab world have been unable to surmount these pressures until now, it appears that Saudi Arabia’s stock exchange is their lingering hope.
Saudi Arabia is currently implementing important reforms to its stock exchange in order to build on the current momentum. Specifically, the Kingdom has announced plans to allow foreign companies to list securities on the Tadawal, effectively taking the Saudi stock exchange a step closer to opening to full foreign investment for the first time. As a recent report in The Financial Times explained, “foreign companies whose securities are listed on other regulated exchanges will be permitted to apply for listing in Saudi Arabia, as long as the rules in the foreign jurisdiction are at least equivalent to those of the kingdom.”
The Tadawal is worth $341 billion. To date, shares trading has been closed to foreign investors, although foreign companies are able to buy shares through complicated swap agreements. And while the Tadawal CEO Abdullah Al-Suwelimy has said there is not a time line in place for opening the market further, the forthcoming changes potentially will create a number of economic opportunities for the country and the region as a whole.
Afterall, the Saudi Stock Exchange (SSE) is the largest securities exchange in the Middle East, with more than twice the market capitalization than the runner up, the Kuwaiti Stock Exchange. Despite the SSE’s current success, since its inception it has had to face a number of challenges in part surmounted through the small but gradual opening of the system.
The SSE has its origins in the 1984 creation of a ministerial committee intended to regulate Saudi Arabia’s securities market. However, it was not until 2003 that the first significant step was made towards a formal stock exchange, when the Kingdom formed the stock exchange’s regulator, the Saudi Capital Markets Authority (CMA). Between 2003 and 2007 the market grew quickly. At the end of this period the stock exchange was one of the largest amongst emerging-market stock exchanges. However, with the onset of the global financial crisis, the Tadawal experienced a sharp fall and is still recovering its losses.
It was during this phase that the stock exchange was converted from a mutually-owned organization into a joint-stock company. In order to curb losses in investments held in the region, the CMA implemented measures to encourage more foreign investment in Saudi securities markets. It was in this context that the CMA released the then-new investment rules allowing non-resident foreign investors to enter swap agreements with Saudi intermediaries, in effect creating an indirect form of ownership of Saudi Arabian securities.
Saudi Arabia’s current decision to allow foreign companies to list securities in the Arab world’s biggest bourse may build on the earlier successes of the CMA’s reforms. By allowing foreigners to directly participate in the stock exchange, the Kingdom is creating conditions to help the region’s equity markets lure investors and boost trading volumes.
For example, the Saudi Stock Exchange is not currently included in the MSCI’s indices covering emerging markets—a tool used by fund managers to benchmark their performance. “MSCI indices are tracked by funds that oversee about $3 trillion in assets, so getting promoted to emerging market from frontier can increase investment. An inclusion at the index provider may also pave the way for an upgrade to emerging market status…” according to a recent article by Bloomberg. If this occurs, issuers throughout the Gulf could list in Saudi Arabia and attract liquidity and valuations, setting the stage for Saudi Arabia to become a regional exchange.
Moreover, the new rules will allow companies with extensive Saudi business to tap the country’s capital markets through dual listings. According to Ali Khan, London-based head of Middle East and North Africa equities sales at Royal Bank of Scotland Group Plc., this “would prove an interesting dynamic for investors and provide companies with an additional source of funding”. Speaking with Bloomberg, Khan went on to say, “It appears the CMA will continue to introduce a series of measures to gradually open up the markets, which would reinforce the Tadawul’s importance in the region.” Indeed if Saudi Arabia manages the reform of its stock exchange with care, it could prove incredibly opportunistic for its future growth, and position as an economic powerhouse in the region.