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Middle EastJuly 2 2006

Confidence rebuilding

Saudi Arabia’s authorities have reacted to recent stock market falls by sacking their regulator and forging ahead with a new financial centre. Jon Marks explains.
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The Saudi stock market crash in mid-May finally cost Jammaz al-Suhaimi his job. The respected regulator had been instrumental in establishing the Capital Markets Authority (CMA), whose creation in 2004 opened the way for the Saudi market to boom as never before. The local market, with new oil price spike wealth trickling down even to the surprisingly high number of poorer Saudis, responded to an extent that took bankers by surprise.

The numbers registered by the Tadawal All-Share Index and other Gulf market indices were staggering: the Saudi market’s capitalisation more than doubled in 2005. But in the first two weeks of March, the Saudi Stock Exchange (Tadawul) lost 30% of its value, and the market remains brittle – halving in value between February and May (while in the year to end-May the Dubai market fell by 53%).

Saudi officials told The Banker they were initially comfortable with the correction, but as the market has failed to pick up as the government would like, nerves have become frayed.

The respected and well-liked Mr Al-Suhaimi was a likely target – and such was local sentiment that the Tadawul rose by 17% after an announcement in the name of King Abdulaziz Bin Abdulaziz Al-Saud said he would be replaced by Abdulrahman Al-Tuwaijri.

Former International Monetary Fund official Mr Al-Tuwaijri has a busy agenda: Mr Al-Suhaimi’s last high-profile job at the CMA was to announce that Riyadh would tackle investor jitters by part-privatising the Tadawal – now the largest stock exchange in the Arab world – as part of a wider shake-up that would also see a world-scale financial district being built in Riyadh at break-neck speed.

Restoring trust

Tadawal is planning an initial public offering (IPO) later this year, in a bid to restore investor confidence and boost demand for shares. According to Abdullah al-Suweilmy, the exchange’s general manager, a price valuation is under way.

There is no decision yet on how large the flotation will be. The government has a record of divesting 30% stakes, but Mr Al-Suweilmy hints that the kingdom will go further this time and could, potentially, sell a majority stake to investors.

CMA spokesman Abdulaziz Alzoom says the government will transfer Tadawal’s management to a new holding company to pave the way for the IPO. The bourse’s name will be changed to the internationally friendly Saudi Arabian Financial Exchange (Safe).

Haven for Safe

Safe will be relocated to a grandiose new financial centre in the north of Riyadh – another plank in the authorities’ plans to remake the Saudi financial sector. The new King Abdullah Financial District (KAFD) “will be the Middle East’s first financial district on a scale, and of regulatory and technological standards, to match the major global financial centres”, a launch press statement said.

Apart from Safe, the KAFD will house the CMA, banks and other financial institutions. Building will begin next year and is anticipated to take three years – in the process creating a mini-construction boom in a region where poorer young Saudis need jobs. The KAFD will cover 1.6 million square metres, with floor space reaching three million square metres. Projected costs are likely to top $9bn, but the government is confident it will put Riyadh in pole position as the Middle East’s financial capital.

Meanwhile, the signs are that Gulf markets will weather the crash, despite jitters in several capitals.

“We are not going to be unduly concerned by the equity market downturn,” Paul Taylor, group managing director of Fitch Ratings, said during a late May visit to Dubai. “There is still a ton of money coming into the region because of oil.”

Projects such as the KAFD are based on the assumption that those huge capital flows will continue to oil the wheels of regional markets, where systemic risks remain relatively low. The Europe-based ratings agency observed that Saudi Arabia’s performance on its Banking System Indicator (the weighted average of Fitch’s individual bank ratings) and Macro-Prudential Indicator (which tests whether bank credit to the private sector and real estate prices are above trend) tools placed Saudi Arabia (and Kuwait) in the same category as Spain.

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Read more about:  Middle East , Saudi Arabia