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Author: Justin Keay, Mark Townsend

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Refining The Mix
King Abdullah's Legacy For Saudi Arabia
Saudi Arabia Throws Open The Doors To Foreign Investors
Saudi Arabia | Banking Sector Report


Refining The Mix
King Abdullah's Legacy For Saudi Arabia
Saudi Arabia Throws Open The Doors To Foreign Investors
Saudi Arabia | Banking Sector Report


Saudi Arabia Throws Open The Doors To Foreign Investors

Last July the Capital Markets Authority (CMA) of Saudi Arabia published a set of draft rules for consultation for a new investment category it referred to as Qualified Foreign Financial Institution (QFI). In what many consider a bold move, it follows a decision by the kingdom’s council of ministers to establish regulations that would allow direct investment by foreigners for the first time on the Tadawul, the kingdom’s $530 billion stock exchange. Until the ruling came into effect, foreign investors outside of the region were restricted to indirect exposure through back-to-back swap arrangements and mutual funds.

Institutional investors expect to be able to invest directly in the first half of 2015, and many are excited by the prospect. Simply put, the Tadawul dwarfs all other stock markets in the Gulf. Its capitalization is bigger than that of all of the Gulf exchanges put together and is larger than Mexico’s and equal to South Africa’s (see chart).

Even so, the CMA’s draft rules are daunting for foreign investors and will exclude all but the largest. QFIs can hold no more than 5% of the shares of any company traded on the Tadawul. Additionally, QFIs in aggregate may not hold more than 20%, and foreign investors may not hold in aggregate more than 49% of the shares of any company traded on the Tadawul. Non-Saudi ownership of all shares listed on the Tadawul is limited to 10% of overall market value.

A potential QFI must also have total assets under management of not less than
18.75 billion Saudi riyals ($5 billion). The far-reaching nature of the rules that have led some analysts to draw attention to the kingdom’s cautious approach. Amgad Husein, partner at the Wael A. Alissa law firm, in association with Dentons in Riyadh, says ownership limits may lead to an unpredictable experience for QFIs. “It remains to be seen how this will be implemented as a matter of practice. Since there are certain restrictions limiting foreign ownership in the aggregate, QFIs will have to implement their best efforts to carry out investigations in good faith to make sure that they are not violating limits each time they purchase listed shares.”

Some industrial sectors, such as mining and media, and the two holy cities of Mecca and Medina, may be off limits to foreign investors. Despite the complexity, investment firm Jadwa’s Fahad Alturki believes that both investors and policymakers in Saudi Arabia will want to press ahead. “With such good performance of the non-oil sector despite low oil prices and weak global recovery, I do not think there is any plan to adjust the timeline for opening up of the Tadawul.” Nevertheless, investor sentiment may be tempered as equities listed on the Tadawul look expensive with respect to comparable markets. Until recently, the Tadawul was trading at more than 20 times forward earnings—well above its long-term average and at a premium to the MENA region. Indeed, valuations attached to Saudi firms are more on par with developed-world market aggregates such as MSCI World.      
~ Mark Townsend

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