Saudi Silence Frustrates Foreigners on Eve of Bourse Opening

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Investors are no closer to understanding how the opening of Saudi Arabia’s stock market will work than they were in August, when the country published draft rules on the plan.

Eleven weeks before the end-of-June deadline that the Middle East’s largest bourse set itself to give foreigners direct access to the market, the Riyadh-based Capital Market Authority has yet to explain how it will square the new rules with existing restrictions on foreign involvement in Saudi businesses. That’s left would-be investors guessing how trading will be affected by laws that keep foreigners out of industries ranging from real estate to fisheries.

Companies are asking for “more clarity on regulations around the mechanics of investing,” Glenn Lovell, a partner at the Al Tamimi & Co. law firm who is advising international investors on the opening of the market, said by phone from Riyadh on March 24. “What will happen, and we see this quite a lot in Saudi Arabia,” is that the issues will be ironed out over an extended period of time as “the implementing officials become more familiar with the new law,” he said.

The lack of clarity underscores the difficulty the world’s biggest oil exporter has in giving outsiders greater influence in a country where movie theaters are banned, executions are carried out publicly and the Grand Mufti, the highest religious authority, can override any judicial ruling. The kingdom, home to two of Islam’s holiest sites, is seeking to attract increased investment to the $521 billion stock market without angering conservatives dedicated to preserving the nation’s Islamic roots.

‘Economic Bubble’

The Tadawul All Share Index has risen 10 percent this year, the most among major gauges in the six-nation Gulf Cooperation Council. The measure, the world’s fifth-best performer for the first nine-months of 2014, ended the year 2.4 percent lower after the price of oil slumped about 50 percent. The government reaffirmed the timetable for opening the stock market to foreigners even after crude’s decline.

“On the one hand, Saudis don’t want foreigners disrupting their economic bubble or running loose on their sacred turf, and on the other, they want the economic benefit of letting foreigners in,” Ghanem Nuseibeh, the Dubai-based founder of Cornerstone Global Associates, a Middle East risk consultancy that advises Saudi businesses preparing for the change, said by phone last month. “They’ll probably be shocked at first when they find out that some company run by a Jewish woman owns Saudi shares, but they’ll get over it.”

Since 2008, foreigners have accessed the market through equity swaps, which the government hoped would be enough to boost trading and discourage short-term speculators. It wasn’t. Saudi Arabia’s benchmark index of equities is the world’s seventh most volatile gauge among more than 70 tracked by Bloomberg. The measure is trading below its 50-and 200-day moving averages.

Limit Speculation

The plan to open to foreigners this year is another step away from a market affected by speculators and large trades by wealthy investors, Lovell said.

The kingdom is following China’s example, which, according to Wu Kan, a money manager at Dragon Life Insurance Co. in Shanghai, has been opening its markets to foreign investors gradually since 2002 to boost institutional participation and “rational investment.”

India started giving foreigners access to its stocks in 1992, about a year after foreign reserves fell below $1 billion and the nation was on the brink of default. Reserves have since exceeded $330 billion.

Negative List

Saudi Arabia’s draft regulations would open the market to foreign investors with a minimum of $5 billion of assets under management and at least five years experience in the business. They also detail ownership limitations on each stock and how to register, and include two clauses that say other legislative limitations on foreign ownership in joint stock companies and by-laws apply.

The nation has a so-called negative list, a lineup of businesses foreigners can’t invest in, published on the Saudi Arabian General Investment Authority’s website. One of the businesses is real estate investment in the holy cities of Mecca and Medina, where non-Muslims are barred from entering and could face punishments ranging from deportation to execution if they violate the ban.

“The draft rules for qualified foreign financial institutions to invest in listed shares takes into consideration all existing regulations and royal decrees that are still in effect,” CMA spokesman Abdullah Alkahtani said in an e-mailed response to questions April 8. “Therefore, foreign ownership of real estate in Mecca and Medina will also be taken into account.”

Restrictions

Mecca’s chamber of commerce in August said foreigners should be barred from owning shares in Mecca-based Jabal Omar Development Co., Makkah Construction & Development Co. and Medina-based Taiba Holding Co. The companies account for almost 7 percent of the nation’s Tadawul All Share Index. The chamber didn’t respond to e-mails and calls seeking comment last week.

“Saudis aren’t going to be happy if foreigners own anything in Mecca and Medina, so we’ll probably see strict restrictions on companies with assets in these places,” Emad Mostaque, who travels regularly to Saudi Arabia as a strategist at emerging markets consultancy company Ecstrat in London, said by telephone last month.

The uncertainty affects more companies than just Jabal Omar, Makkah Construction and Taiba, Lovell said. The lack of clarity raises the issue of whether the regulator will require disclosures of all companies’ assets, and if corporates that do business in Mecca or Medina will also be impacted by a potential ban, he said.

Given how long Saudi Arabia has managed to keep foreigners out, reconciling existing laws with new ones will take time, Cornerstone’s Nuseibeh said.

“It’s going to be frustrating for a while as the Saudis figure out how to make this work, but since Saudi Arabia is the Middle East’s honeypot, investors are willing to wait.”

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