By: Jad Fares
In 2015, the Capital Market Authority announced rules that allow foreign investors to gain exposure to securities listed on the Tadawul, Saudi Arabia’s stock exchange. Historically, foreign money managers had to enter into swap transactions to gain such exposure. Now, with declining oil prices, the country is diversifying its economy. Its “Vision 2030” plan, a series of market and labor reforms, aims to enable the country to “live without oil by 2020”.
The Tadawul’s market capitalization is not just dominated by commodities, but has a diverse range of sector listings. To raise government revenues, a number of state-sponsored institutions could also be privatized. A key reform in Vision 2030 is to sell up to 5% of shares in Saudi Arabia Oil Company (Aramco). Saudi Arabia values Aramco at $2.5 trillion and, if fully floated, it would be the world’s largest corporation – very appealing to large, international investors and money managers.
However, these new rules present some challenges. They apply only to Qualified Foreign Investors (QFIs) with more than $5 billion in assets and a minimum of five years’ financial services experience. QFIs must be located in a third country that meets regulatory equivalence with Saudi Arabia.
Other restrictions include:
- No single QFI can own more than 5% of listed shares of a single issuer
- Total QFI exposure to a single issuer cannot be above 20%
- Foreign investors cannot have exposure to more than 10% of all shares listed on the Tadawul by market capitalization (including swap exposures)
Historically, foreign investors avoided Saudi exposure because custody was carried out by domestic brokerage houses that lacked balance sheet capital and adequate risk controls. Now, an independent custody model can be used, making the market more attractive. One challenge for Saudi Arabia is that trades must be pre-funded as the market operates on a T+0 settlement time, which increases counterparty risk and makes correcting trading errors difficult.
Since the changes, trading volumes have increased slightly, and will likely pick up once Saudi Arabia is elevated to the MSCI Emerging Market Index.
Saudi Arabia’s capital markets present significant opportunities for international investors. With a local presence in the Middle East, SS&C will serve as a valuable resource for firms looking to enter Saudi Arabia and diversify their activities without taking on added operational risk.