After several years of deliberations, the Saudi government is considering reforms that open up the country’s equity market for foreign investors to stimulate equity investment in KSA.
The kingdom has long debated introducing market liberalisation reforms and technical preparations, but never announced a formal date for opening the market to foreigners. Worried about destabilising the market with huge fund inflows and risking the loss of control of Saudi assets to foreigners, the authorities have been reluctant to launch the reforms. Despite lack of participation by foreign investors, the Saudi bourse has continued to achieve strong growth, rising about 21 percent this year.
The chances of reform implementation have been boosted with the hiring of Mohammed bin Abdulmalik Al Sheikh as head of the Capital Market Authority (CMA) earlier this year. His experience in international markets is expected to convince the government to finalise a new regulatory framework, allowing relaxed foreign ownership of stocks.
The kingdom may follow a model similar to China, Taiwan and some other major emerging markets in opening its bourse to foreign investors. Under the proposed laws, qualified foreign investors will be awarded licenses for investment quotas based on various factors, such as the amount of assets under their management.
The Saudi equity market: Healthy now, but even stronger after reforms
Saudi Arabia boasts the Arab world’s biggest stock market, with a market capitalisation of about USD 417 billion. At an estimated USD 110 billion, Qatar is the Gulf’s second largest equity market. Foreigners are only allowed to purchase Saudi shares through swap deals made by international investment banks or via a small number of exchange-traded funds. However, such transactions are costly and inefficient and foreigners only hold about 5 percent of the equity market in Saudi Arabia.
The reforms to encourage foreign participation in the equity market may also improve chances of Saudi inclusion in the MSCI index. Qatar and the UAE were recently upgraded to emerging market status in the index after they relaxed rules for access to foreign investment in the equity market.