So You're Longing To Buy Saudi Stocks?

Finally there's a way, as Riyadh opens the investment portals

Saudi Arabia's stock market has a lot going for it. With a capitalization of more than $50 billion, it's the largest in the Middle East. And with shares yielding 5% and selling at less than 13 times earnings, it's a bargain. But most global investors can't buy Saudi stocks. Only citizens of Saudi Arabia and neighboring Gulf countries have been allowed in.

Now, that's about to change. In early August, the first closed-end fund permitted to invest in Saudi Arabia will begin trading on the London Stock Exchange. Managed by Saudi American Bank, a Riyadh-based Citibank affiliate, the Saudi Arabia Investment Fund will be the only way for foreigners to buy into the oil-rich kingdom. So it's little surprise that the $250 million initial offering may not meet demand. "Judging by investor interest, we'll have to consider a higher number," says Saudi American chief economist Kevin Taecker.

GINGERLY. The fund's launch is one of a series of financial reforms that could transform the oil-rich economy of the conservative Islamic monarchy. Under Finance Minister Ibrahim Al-Assaf, Saudi Arabia is gingerly becoming more investor-friendly. Private businesses are competing to build power plants and manage ports, while Riyadh's bid to join the World Trade Organization stands to pry open the kingdom's cloistered economy further. "The Saudis are starting to deregulate and go for the same kind of high economic growth we see in other countries," says Michael J. Howell, head of emerging market investment advisers CrossBorder Capital in London.

Saudi Arabia is not a typical emerging market. It's the world's largest oil exporter, making the kingdom's $136 billion economy the largest in the Middle East, replete with modern airports, seaports, and telecommunications networks. Inflation is only 1.2%, and the Saudis have virtually no foreign debt.

But one thing is in short supply: jobs. Saudi Arabia's population of 18.5 million will double in 19 years. Until recently, university graduates were all but guaranteed government employment. But $60 billion in Gulf War bills and weak oil prices have made that a thing of the past. Youth unemployment, with its potential for destabilization, is soaring. "They know this is the major problem--worse than fundamentalism, worse than Iran," says a top Western diplomat in Riyadh.

The only way out of this dilemma is to woo foreign investment and try to win back some of the $150 billion to $200 billion Saudis themselves parked offshore. That realization, say Saudi watchers, persuaded King Fahd and senior members of his royal family to bring in a new economic planning team last year, replacing ministers serving for two decades or more. The key figure is Al-Assaf, a respected former executive director of the World Bank. Yet some critics say Al-Assaf isn't moving fast enough. Maybe he can't: Major economic decisions still are made by the 77-year-old King, who is in poor health.

So far, Riyadh has made no move to sell big stakes in major companies, such as its 70% of Saudi Basic Industries Corp., a petrochemical maker and the stock market's biggest company. Indeed, J. Mark Mobius, head of Templeton Emerging Markets Fund, calls the new Saudi fund "too little, too late." But he adds he may buy in. "It's the only way to invest in that market," he says. That unique quality will be the fund's strongest selling point.

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