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 When Riyadh opened its bourse to direct foreign investment last
June, it took a cautious approach, imposing tight ownership limits
and minimum qualifications for overseas institutions to reduce the
risk of them destabilizing the market.
Reforms announced on Tuesday suggested authorities are now courting
foreign money more aggressively. Last week, Deputy Crown Prince
Mohammed bin Salman outlined sweeping plans to cut the kingdom's
dependence on oil exports.
Among his plans are a privatization program that will include
offering a stake of under 5 percent in national oil giant Saudi
Aramco. The Saudi stock market could have trouble absorbing the
shares without an infusion of foreign money.
“This is a very good piece of news and supportive of the stock
market in the medium- to long term," Sebastien Henin, head of asset
management at Abu Dhabi's The National Investor, said of Tuesday's
announcement.
"It may clear the road for the possible listing of Aramco
shares...All in all, this will align the bourse with international
markets and encourage foreign investors to allocate funds to Saudi
shares."
Each foreign institutional investor will be allowed to own directly
a stake of just under 10 percent of a single listed company, up from
a previous ceiling of 5 percent, the Capital Market Authority (CMA)
announced.
Other restrictions were scrapped, including a ceiling of 10 percent
on combined ownership by foreign institutions of the market's entire
capitalization. All foreign investors combined will still be limited
to owning 49 percent of any single firm.
To qualify as a foreign institutional investor in Saudi Arabia, each
asset manager will only need to have a minimum of $1 billion of
assets under management globally, instead of $5 billion. The CMA
said it would now accept investments by new types of foreign
institution including sovereign wealth funds and university
endowments.
The regulator also said it had approved the introduction of
securities lending and covered short-selling to the stock market,
which would give investors more options to hedge their purchases
against market downturns.
Meanwhile, the Saudi Stock Exchange will introduce during the first
half of 2017 the settlement of trades within two working days of
execution, the bourse said.
At present, trades must be settled on the same day. This has
inconvenienced foreign investors in particular as they must have
large amounts of money on hand before trading, which can be hard
given Riyadh's time zone and its Sunday-Thursday business week. Many
big emerging markets have settlement after two days.
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MSCI ENTRY
Saudi Arabia wants to join international index compiler MSCI's
emerging markets index as soon as in 2017, because many global funds
base their investments on that index. Officials have conceded
same-day settlement is an obstacle to inclusion.
MSCI is expected to say in June whether it will review Saudi Arabia
for possible inclusion in the index, and the reforms announced on
Tuesday could help to sway its decision.
Nevertheless, the Saudi stock market did not react positively to the
announcement; its index was 1.4 percent lower in late trade.
One reason is that the reforms will take considerable time to
materialize. The CMA said its new foreign ownership rules, and a
date for them to take effect, would be revealed only by the end of
the first half of 2017.
A deeper reason is that despite last June's opening to foreign
institutions, overseas funds have so far not been very keen to put
their money into Saudi Arabia; total direct and indirect foreign
investment accounts for less than 1 percent of the $408 billion
stock market, bourse data shows.
Low oil prices, as well as the inefficiencies of Saudi firms and the
greater dynamism of other emerging economies, have diverted money
from the kingdom. It may take years before it becomes clear if the
economic reform drive will change this.
At the end of 2015, only nine foreign institutions had obtained
licenses to invest directly in the Saudi market. The Middle East
head of a big international fund manager, declining to be named
because of commercial sensitivities, said this number would not
necessarily rise sharply when restrictions were eased.
"You can ease regulations as much as you want, but the value
proposition of Saudi Arabia needs to be strong enough to make it
worthwhile for institutional investors to come in," he said.
(Additional reporting by Celine Aswad and Tom Arnold in Dubai and
David French in Riyadh; editing by Anna Willard)
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