Analysis: Saudi Arabia Opening Up its Stock Market

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With region’s one of the biggest economy, Saudi Arabia, all set to open up its Stock Market to foreigners, Frost & Sullivan’s Vinod Cartic provides his expert insights on the implications.

The iconic Kingdom Tower in Saudi Arabia
With region’s one of the biggest economy, Saudi Arabia, all set to open up its Stock Market to foreigners, Frost & Sullivan’s Vinod Cartic provides his expert insights on the implications. Photo-The iconic Kingdom Tower in Saudi Arabia. 

The Kingdom of Saudi Arabia (KSA) will open its USD 530 Billion share market to foreign investments in mid-June 2015. This is being keenly viewed by international investors as it will give them access to the largest economy in the Middle East. Foreign investors will now be able to invest in a stock market that is more representative of the real economy.

The KSA’s stock market, The Saudi Tadawul, lists very large conglomerates spanning various verticals in the region, including petrochemical leader Sabic (Saudi Basic Industries Corp.). The market is more than twice as large as the United Arab Emirates (UAE) and more than thrice as large as Qatar.

The country also evinces significant investor interest due to an active IPO (Initial Public Offering) market. In 2014, the National Commercial Bank, raised USD 6 Billion in largest share sale in the history of IPOs in the Arab nations.

There are certain concerns for investors, especially those concerning regulation, transparency in procedures and (lack of) clarity in Government policies. Additionally, Saudi Arabia has an economy that is heavily skewed towards petroleum, with 90 per cent of all revenues coming from oil. For these reasons, the KSA is being viewed with caution as a risky proposition.

However, the chance of investing in some of the world’s fastest growing companies provides commensurate opportunities for return. In comparison, with their neighbours, policy makers in Saudi have been seen as more pro-active and forward thinking. The Government also sees the huge potential for job creation arising out of foreign investments, for its burgeoning youth demography that is struggling to find employment.

Frost & Sullivan estimates that once its capital market opens up, Saudi Arabia will have 4 per cent weight in the Morgan Stanley Capital International emerging market index. This would imply that hundreds of billions of dollars would flow into investments in Saudi Arabia which is likely to give a major boost to the contribution from Middle East and North Africa in their emerging economy.

The Saudi economy has been growing at an average rate of 6 per cent per annum. This is largely driven by energy, public sector and finance based companies. The inflow of foreign investment will help diversify this to multiple sectors, namely, information technology, education, infrastructure, chemicals, automotive, metals and manufacturing. The KSA’s pivotal position on the globe, bridging the east and the west, implies that sectors like aviation and transportation will also have a huge role to play in the future, thus granting a more holistic look to the currently ‘oil- skewed’ Saudi economy.

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