Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Middle EastMay 1 2018

Saudi Arabia's Capital Market Authority sets reform example

A key component of Saudi Arabia's wide-ranging reforms include modernising the economy, and the Capital Market Authority, led by Mohammed El-Kuwaiz, is in the forefront of driving this change. James King reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Saudi skyscraper

The complexity of Saudi Arabia’s Vision 2030 reform programme is matched only by its scale. Nearly every element of the country’s social and economic fabric is being revised to meet the objectives laid out under the programme. As public sector agencies drive their respective reform briefs forward, some are having more success than others. This is to be expected when it comes to structural economic change but it has given the Vision 2030 agenda an alpine quality, characterised by the peaks and troughs of reform and stagnation.

Sitting atop one of the highest peaks is Saudi Arabia’s Capital Market Authority (CMA), which has emerged, in many ways, as a standard bearer for the globally integrated economic model that the government is pursuing. Led by chairman Mohammed El-Kuwaiz, the CMA has earned plaudits both inside and outside Saudi Arabia for setting out a clear reform vision and executing real change. Indeed, over the past year, the pace of this reform has picked up considerably.

“From a capital markets perspective, there has been a real energy behind the reform programme,” says Tariq Al Sudairy, chief executive of Jadwa Investment. “Over the past year or so, there has been the launch of the Nomu market [a parallel equity market], the launch of the real estate investment trust [REIT] market, the conversion of the settlement cycle to T+2 and improved qualified foreign investor [QFI] access to the local market.”

The right experience

For his part, Mr El-Kuwaiz embodies a new class of leadership in Saudi Arabia. Appointed CMA chair in July 2017, following a year as vice-chair of the organisation, his extensive private sector experience (which includes working at consultancy McKinsey & Company and launching his own investment firm, Derayah Financial) lends itself to modernising and globalising the Saudi capital market.

“One of the things that has been on the CMA’s agenda is the deregulation of the capital market,” he says. “We have focused a lot of our resources on that. We have started by deregulating investor access, which includes the launch of a new QFI programme in January 2018.

“Over the past year we have licensed a much larger number of market participants, most of them international. Citigroup is now active in Saudi Arabia and we have had a few existing licensed firms announce either an expansion of their activities or an increase in their investments in the capital market,” he adds.

Stock boost

As of January 23, the CMA lowered the minimum value of assets under management for QFIs from $1bn to $500m. It also increased the limit for a single QFI’s stake in one company from 5% to 10%, while lifting the threshold for total foreign holdings in a listed entity to 49%. In a nod to these reforms, and others, index provider FTSE Russell reclassified Saudi Arabia under its emerging markets index in March 2018. Saudi stocks will be included from March 2019.

The CMA is currently working on the required legal framework for price stabilisation to increase attractiveness to large IPOs in the market 

Mohammed El-Kuwaiz

Many observers expect an additional boost in June, when fellow index provider MSCI is anticipated to issue a similar reclassification. Cumulatively, these changes will see billions of dollars of foreign inflows into the country’s capital market. Mr El-Kuwaiz’s next objective is to permit foreign issuers to list in Saudi Arabia.

“Very soon – which is the only remaining piece of the puzzle in terms of deregulation – we are likely to deregulate issuer access to allow non-Saudi issuers to access the Saudi capital market via a dual listing or direct primary listing,” he says. “We are working on the regulatory framework [for foreign issuer access] this year. We are hoping we will be able to receive something that can go to the market by the beginning of 2019, but this is largely a function of who applies, whether they are suitable and the market environment at the time of the offering.”

These reforms are expected to internationalise the Saudi capital market to a much greater extent than it is today. In the first quarter of 2018, for instance, there has been a large increase in foreign investor activity. Research from Jadwa Investment indicates that net purchases of swaps (a derivative contract) and buying by QFIs reached SR7.9bn ($2.1bn), while March saw the largest ever net inflow of collective swaps and net inflow purchases.

“Over the past year we have had a systematic increase to the rate of foreign investor buy in and ownership in the Saudi capital market on a weekly basis. Naturally it comes in parallel with index inclusion. But we take it as a vote of confidence in the macro picture in terms of the regulatory plan but also in terms of the more granular reforms [we] have been taking on the capital market side,” says Mr El-Kuwaiz.

Appetite for REITs

Meanwhile, the CMA’s introduction of instructions governing the listing of REITs to the Saudi capital market, in November 2016, is also bearing fruit. By the end of the first quarter of 2018, 12 REITs were listed on the Tadawul with a total market capitalisation of $2bn. Research from Knight Frank indicates that even more REITs are expected to be listed in 2018, given the large number of approvals that are currently in the pipeline.

“At Jadwa we listed our first REIT in April 2017 and we listed our second in February 2018. This makes us the first investment firm to list two REITs on the Saudi market and the largest manager of REITs with more than SR2.3bn of assets under management. The Jadwa REIT Saudi fund launched with 7.3% yield, which is expected to grow over time. It was the first REIT to offer quarterly distribution on dividends,” says Mr Al Sudairy.

Over the past year we have licensed a much larger number of market participants, most of them international

Mohammed El-Kuwaiz

The next two years are likely to be some of the most notable in the history of the Saudi capital market. In particular, there is the impending initial public offering (IPO) of a 5% stake in state energy giant Saudi Aramco. The expectation is that a dual listing will occur, involving the Tadawul and an international exchange, although this remains far from certain. Reports from inside Saudi Arabia suggest the authorities may be delaying the listing until 2019 to improve its valuation. The CMA, meanwhile, is updating its regulatory structures to handle a listing of this size.

“Given our goals for the capital market in general, we are taking the prospect of any large-scale listing, including Aramco, as an opportunity to road test the level of our regulations. We want to see if they stack up and can absorb an offering of the size of a listing such as Aramco,” says Mr El-Kuwaiz.

Focus on price stability

In particular, the introduction of a price stabilisation mechanism to prevent large share price drops in a freshly listed company is at the top of the CMA’s agenda. “Price stabilisation arrangements often occur in large-scale offers and are often entered into pursuant to a regulatory framework. The CMA is currently working on the required legal framework for price stabilisation to increase attractiveness to large IPOs in the market,” says Mr El-Kuwaiz.

As Saudi Arabia’s reform programme moves from the planning phase to that of delivery, the challenges facing those tasked with implementing this vision are likely to grow. The CMA is clearly aware of this and Mr El-Kuwaiz notes that going from aspiration to execution is the biggest difficulty he faces. But so far, the Saudi capital market is moving in the right direction.

“I think this is a case where initiatives have been announced for implementation and they have been executed quickly. We have seen the fruits of that process, whether it’s on the REITs side or in the growth of QFIs accessing the market,” says Mr Al Sudairy.

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East , Saudi Arabia