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 The opening of the Saudi market, capitalised at about $530 billion,
is one of the most keenly awaited economic reforms in the world's
biggest oil exporter. The bourse would be one of the world's last
major exchanges to begin welcoming foreign money.
"The market will be open to eligible foreign financial institutions
to invest in listed shares during the first half of 2015, with God's
permission," the Capital Market Authority said in a statement.
Saudi authorities want to open the stock market to create jobs,
diversify the economy beyond oil and expose local firms to more
market discipline. They have been preparing the reform for years and
have completed most technical preparations.
But the government has delayed implementing the reform, apparently
concerned about causing volatility in the market as well as the
political sensitivity of allowing foreigners to build large stakes
in top Saudi companies.
Currently, foreigners are limited to buying Saudi stocks via swaps
involving international banks and through a small number of
exchange-traded funds, which are relatively expensive and
inconvenient options.
Foreigners are at present believed to own no more than about 5
percent of the Saudi market, and to account for a smaller fraction
of stock trading turnover.
Potential foreign interest in Saudi stocks is huge, because of the
country's strong economy - the International Monetary Fund on Monday
raised its forecast for Saudi growth this year to 4.6 percent - and
the presence of some of the region's top blue-chip firms.
These include Saudi Basic Industries Corp, one of the world's
largest petrochemicals groups, and National Commercial Bank, the
kingdom's largest lender, which plans an initial public offer of
shares later this year that could be worth $4 billion to $5 billion.
"This is a massive move for Saudi and for the region," said Rami
Sidani, head of Middle East investments at Schroders, a top European
fund manager, which already has about $250 million invested in Saudi
Arabia through indirect means.
He added that the country "will definitely attract massive inflows".
The Saudi market index jumped 1.6 percent in early trade on Tuesday
in response to the news, bringing its gains so far this year to 16
percent.
Foreign investors are estimated to own about 15 percent of other,
much smaller stock markets in the Gulf such as Dubai. If foreigners
raise their ownership of Saudi Arabia to that level, it could mean
an inflow of some $50 billion into the country.
REGULATIONS
In practice, Saudi authorities are expected to use a tight
regulatory framework to ensure that inflows are much slower. The CMA
said it would publish next month draft regulations for the reform;
there would then be a 90-day public consultation period.
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Proposals circulated by Saudi authorities to the financial industry
in the past have indicated Saudi Arabia will follow a model similar
to China, Taiwan and some other major emerging markets in opening
its bourse.
Qualified foreign investors, awarded licences based on factors such
as the amount of their assets under management, would be given
quotas for their investment in the market, while there would be
ceilings for foreign ownership of companies.
Under one set of proposals, foreign institutions would need to have
at least $5 billion of assets under management globally to obtain
licences; each institution could own no more than 5 percent of a
Saudi firm, and all foreigners combined could own no more than 20
percent.
A senior Saudi banker, declining to be named because of the
sensitivity of the issue, said he expected only a "handful" -
perhaps 10 - investment licences to be awarded initially, and that
authorities would then grant more licences gradually as they
monitored the impact on the market.
Because it is closed to direct foreign investment, the Saudi market
has been excluded from major international equity indexes compiled
by companies such as MSCI, even as Qatar and the United Arab
Emirates were upgraded earlier this year.
Opening the Saudi bourse would be expected to lead eventually to its
inclusion in such indexes, helping to make the Gulf a mainstream
destination for international investors. Sidani estimated Saudi
Arabia could ultimately account for around 3 to 5 percent of MSCI's
emerging market index.
"This is a potential game changer for the region – a very important
milestone that people have been waiting for," said Salah Shamma,
co-head of regional equities at U.S. fund management giant Franklin
Templeton.
Following regulatory reforms in the past couple of years, the Saudi
market is one of the most stable and tightly regulated in the Middle
East, fund managers say. It has avoided the wild swings seen in
recent months in markets such as Dubai.
(Additional reporting by Nadia Saleem, David French an Yara Bayoumy;
Editing by William Maclean and Anna Willard)
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