Photographer: Waseem Obaidi/Bloomberg

QuickTake Q&A: Saudi Stock Market Steps Up Bid for Foreign Cash

For the second time in 15 months, Saudi Arabia is loosening rules on foreigners investing in its almost $400 billion Tadawul Stock Exchange. The goal is to lure funds from overseas as the kingdom overhauls its economy to cut its dependence on oil revenue. Greater access for international investors may boost the chances of Saudi stocks being included in major emerging-markets equity indexes, potentially luring billions of dollars more.

1. How open is the Saudi stock market now?

Saudi Arabia opened its stocks to direct foreign investment in June 2015 but with stringent restrictions. It has awarded only a handful of licenses and barred foreigners from buying into initial public offerings. The result: Overseas investors now own just 1 percent of outstanding shares, according to data compiled by Bloomberg. The door, however, is about to swing open.

2. What changes are planned?

From Sept. 4, overseas funds with at least 3.75 billion riyals ($1 billion) under management will be allowed to invest in Saudi stocks -- down from the current threshold of $5 billion. Individual foreign investors will be permitted to own 10 percent of shares outstanding of a company, double the existing limit. Sovereign wealth funds and university endowments will be free to invest for the first time. And from January, qualified foreign investors will be able to take part in IPOs. The exchange has also pledged to bring its settlement cycle for share trading in line with global norms by the end of June.

3. What’s driving the changes?

The 50 percent-plus slump in oil prices in the past two years has focused the world’s biggest crude exporter on life after oil. As part of the long-term drive to diversify the economy, Saudi Arabia also plans to sell shares in Saudi Aramco, the world’s most valuable company, possibly in early 2018 and deploy the proceeds through its sovereign wealth fund. If part of the sale takes place in Saudi Arabia, the exchange will need a deeper investor pool to help digest the largest IPO in history.

4. How eager are investors?

That depends who you ask. Some want more detail and greater clarity about the new rules. Others say regional turmoil is likely to prolong negative sentiment toward an exchange that has slipped 12 percent this year, the worst performer in the six-nation Gulf Cooperation Council, with trading volumes slumping. However, inclusion in indexes operated by MSCI Inc. and FTSE Russell would attract billions of dollars of passive inflows, according to Mohamad Al Hajj, Dubai-based MENA equity strategist at EFG-Hermes U.A.E Ltd. He says the Saudi market would likely account for 2.5 percent to 3 percent of the emerging-market indexes, or twice that of Turkey.

5. Will these changes be enough to earn major index inclusion?

It’s too early to say, although MSCI in June welcomed what it called the “positive evolution” of the exchange. Strategist Al Hajj says that if the proposed reforms to the exchange are carried out, FTSE inclusion is possible in 2018 followed by MSCI in 2019.

The Reference Shelf

  • A QuickTake explainer on Saudi Arabia wanting foreign investors but not their foreign ways.
  • A story on the new rules being implemented in September.
  • A story on how foreign investors will be able to participate in IPOs.
  • An overview of Saudi Aramco, the most valuable company in the world and a candidate for IPO.
  • An interview with Saudi Arabia’s deputy crown prince, spelling out his vision for the kingdom.
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