After a number of years in the making, the Saudi Arabia authorities finally announced last week that Qualified Foreign Institutions (QFIs) will be allowed to invest in shares listed on the Tadawul starting from June 15th, 2015. While foreign investors have been able to invest in Saudi Arabia since 2008, this has been limited to ETFs, swaps and P-notes, none of which allow direct ownership of the underlying equity. Opening the market to QFIs as a first step is a tried and tested approach in emerging markets (e.g. China in 2002, India in 1992, Taiwan in 1991). Institutional investors who do not meet the criteria for investing directly will likely continue to use the existing products mentioned above.
The Tadawul is the Middle East’s largest and most liquid market, and effectively the largest closed emerging market today. The 165+ listed companies have a combined market capitalisation of over $550bn, with petrochemicals and financials industries the dominant sectors. Recent IPOs have added more consumer and non-cyclicals to the market. A number of commentators are speculating that Saudi Arabia could receive an emerging market classification from index provider MSCI within the next two years, which is in turn likely to drive additional investor interest. MSCI’s Sebastien Lieblich was quoted last year as saying that if Saudi Arabia were added to the Emerging Markets Index it would constitute around 4 per cent of the total market, similar to Mexico and Russia. This development would mean that Saudi Arabia could make it into the top 10 rank of EMs as classified by the MSCI (see graph below).
The Kingdom presents investors with a unique set of dynamics. Its economy has gone from strength to strength in recent years as it has benefited from high oil prices and output, strong private sector activity, increased government spending, and the implementation of a number of domestic reform initiatives. Rising oil prices and oil production have also resulted in large external and fiscal surpluses, and government debt has declined to almost zero. With a population of over 30 million, over half of whom are under 25 years old, it is the region’s youngest and most populous nation. Of course, there are risks. First, the Kingdom’s dependence on oil revenue (over 90 percent of fiscal revenues and 80 percent of export revenues come from the sale of oil) leaves it hostage to fluctuating oil prices, as have been seen since the summer of 2014. Geopolitical tensions in the region further added to such worries. As with all emerging markets, there have been some corporate governance-shaped bumps in the road, however the opening of the market to foreign investors will undoubtedly help smooth the path to transparency and benefit companies and investors alike.