The Kingdom of Saudi Arabia’s Capital Market Authority is in the final stages of developing a regulatory framework to allow foreigners to own stocks directly.
The move is being viewed as a way to promote greater foreign investment in the Kingdom, although the market does not need liquidity from international investors. Under existing laws, foreign investors can only invest in the equity market through swap deals involving international investment banks and exchange-traded funds. Saudi Arabia is the largest equity market in the Arab world.
“There are a number of government entities, including CMA, that are looking at that (direct foreign investment). We’re finalizing a regulatory framework with certain parameters. We are attracting foreign investment to come to the market for the technical expertise and human capacity.” — Mohammed bin Abdulmalik Al al-Sheikh, head of the Capital Market Authority
At the same time, the regulatory body is also considering steps to limit “high levels of speculation” in the stock market so that investors are safeguarded. The government is also seeking to add depth to the financial market by encouraging institutional investment in the market. It aims to introduce several investment instruments and funds, including sukuk (Islamic bonds) and other debt tools. While 45 percent of the total stocks are owned by individuals, around 93 percent of shares are traded by retailers on a daily basis.
Opening the market directly to foreign investors is also expected to make the market more transparent, benefiting all market participants. Large institutional investors would be pushed for greater disclosures and could also result in Saudi equities being included in the emerging markets indices. Bloomberg, Deutsche Bank AG and HSBC Holdings Plc. predict that Saudi Arabia will open the market for direct foreign ownership early next year. The rising demand for assets in the Kingdom may attract inflows of up to USD 30 billion.