Saudi Arabia unveils part 3 of plan to overhaul its economy: Doubling the size of its stock market

Saudi Arabia intends to almost double the size of its stock exchange, among the most closed on the planet, with the addition of a large number of companies and making it simpler for foreigners to invest.

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The kingdom aims to draw in privately operated firms to list out while privatization through the government will even raise the market, said Mohammed Al-Jadaan, chairman of the Capital Market Authority, the country’s regulator. The Tadawul All Share Index will increase to 250 companies from about 170 now and its US$380 billion market capitalization will grow to match the size of Saudi gdp within seven years, he explained.

The government wants to “ensure that the market turns into a real associated with the economy in terms of size,” Al-Jadaan said in the royal compound in Riyadh. The present value of listed companies stands at about 57 percent of GDP, he said.

The ambitious plan is a part of an unprecedented overhaul from the Saudi economy, the largest in the Middle East, to wean the nation off oil. It’s being driven by Deputy Crown Prince Mohammed bin Salman and was outlined inside a five-hour interview with Bloomberg News a week ago.

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Aramco IPO

The project includes the first public offering of the small stake in oil giant Aramco, the creation of the world’s largest sovereign wealth fund and new budget measures that would raise a minimum of an additional US$100 billion a year by 2020, a lot more than tripling non-oil income in contrast to now. 

Developing the equity and debt markets with the addition of new listings and merchandise is key to helping bring money in to the economy. As well as broadening the stock index, the main city Market Authority also plans to foster derivatives trading, the debt market and introduce investment trusts, Al- Jadaan said.

“The marketplace is undergoing massive reforms to facilitate inflows in to the kingdom, using the Tadawul playing an excellent conduit for channeling foreign investment,” said Rami Sidani, who helps manage US$1.4 billion in stocks as the head of frontier investments at Schroders PLC in Dubai. “Aggressive privatization is important to assist the economy diversify from oil.”

The Tadawul Index jumped the most since March 17 on Monday, gaining 1.4 per cent. It fell 0.2 per cent , paring this year’s advance to 10 %.

No stampede

While OPEC’s biggest oil exporter is gradually removing barriers to the market, there’s hardly been a stampede. Since opening it to direct foreign purchase of June, susceptible to strict rules, 11 overseas investors have received licenses as qualified banking institutions to exchange the marketplace, Al- Jadaan said.

All foreign investors – including strategic partners and people using swaps – bought stocks valued at 3.2 billion riyals (US$853 million) in March, based on data on the stock market website. Which means their ownership stood at 4.4 per cent of total market capitalization. Those with QFI licences bought about 67 million riyals.

The new model for Saudi capitalism is made to change that.

The Capital Markets Authority is planning derivatives to have a “vibrant and sophisticated” market and rules for REITs are scheduled after this season, Al-Jadaan said. There are also plans for any secondary stock exchange for small , medium-sized enterprises that will be limited to “sophisticated investors,” he explained. 

“Currently, we’ve just the equity market as the really strong market,” he said. “We need to get the debt side.”

Introducing derivatives would improve the efficiency of the market and allow investors to hedge risk while adding debt products would given them more choice, said Muhammad Faisal Potrik, the head of research at Riyad Capital.

“Our outlook for the market is positive in the future according to these developments, although markets may remain volatile within the short-term on oil price movement,” he explained.

Bloomberg News