Visitors to the Saudi capital Riyadh note its physical resemblance to that other desert-bound oil city, Houston, Texas. Like the Texans, the Saudis also like to think big – and with billions of oil revenues flowing into state coffers, they now have the financial muscle to implement the more grandiose schemes that are being sketched out in corporate boardrooms.
The latest grand project to roll out of the architect’s studio is a masterplan to transform Riyadh into an international financial centre. In May, the Capital Markets Authority (CMA) announced a plan for the creation of a mega financial city, the King Abdullah Financial District (KAFD), located on 1.6m square metres of undeveloped land close to the city centre, with around 3m square metres of office space.
The idea is to bring the kingdom’s banks, stock exchange and the CMA – along with the central bank, the Saudi Arabian Monetary Agency (Sama) – under one roof. A new financial academy will attempt to boost local skills levels and furnish the cream of financial services firms with a new pool of young, market-savvy Saudis from which to recruit. The entire project will be owned and developed by the Public Pensions Agency, which will also accrue the investment earnings generated from the rents.
The KAFD has grander ambitions than relocating financial services firms. Following in the slipstream of Dubai and Qatar, Riyadh aims to put itself firmly on the map as an international financial centre, luring in the financial services blue chips and galvanising the wider development of the Saudi financial sector. According to the CMA, the impetus is no less than to “consolidate Saudi Arabia’s position as the world’s oil capital and capture the position of Middle Eastern financial capital”.
Riyadh is not the only new financial centre in Saudi Arabia. The $27bn King Abdullah Economic City under construction at Rabigh, just north of Jeddah on the Red Sea Coast, will also have a ‘Financial Island’ city-within-a-city, with 500,000 square metres of office space.
Head start
The smaller Gulf economies have a head start: the Dubai International Financial Centre free zone has been open for business for the past year, the Qatar Financial Centre has already licensed a number of institutions and Bahrain has a long pedigree as the region’s leading offshore centre – just across the causeway from the Dammam metro area in Saudi Arabia’s oil rich Eastern Province.
After channelling billions into other Gulf centres over the years, the Saudi authorities now believe they have no time to lose. Construction of the KAFD is due to start by 2007, presenting a potentially burdensome logistical problem in an area that is already suffering from traffic congestion.
It is tempting to view the KAFD development as yet another attempt by the Saudis to deploy their surplus to ‘keep up with the Joneses’. But analysts view the plan as part of a wider strategy of economic diversification. “As with Dubai and Qatar, the Saudis also see the financial district as a way of diversifying the economy – and having a financial centre to service their growth and development needs rather than having to import [services] from outside,” says Monica Malik, senior economist at Standard Chartered, based in Dubai.
Local employment
Boosting employment opportunities for young Saudis is a key strategic goal of government policy. By developing the Saudi financial sector, the authorities believe they will also solve one of the biggest social problems bedevilling the kingdom. Sama chairman Hamad al-Sayyari predicts that financial sector employment will double in the next five years.
“It’s a way of increasing employment opportunities. The financial sector tends to be a very attractive area for Gulf Arabs to work in,” says Ms Malik.
It is not just banks, brokerage firms and regulatory bodies that will be housed in the KAFD – there will be law firms, accountants and ratings agencies too, in an initiative to encompass the whole range of financial services activities, unlike Qatar which is trying to focus on specific areas like project finance.
Bahrain, which is busy plotting its own centre – the Bahrain Financial Harbour – is likely to keep the mantle of Islamic banking and offshore banking centre; Dubai is looking to futures exchanges; and the QFC is planning to service the massive gas-based schemes. Saudi Arabia’s pitch will be broader, honing in on the fact that its $300bn gross domestic product dwarfs its regional rivals. “What they are hoping is that, because Saudi Arabia is the biggest economy, a financial centre will attract all those interested in the market,” Khan Zahid, chief economist at Riyad Bank told The Banker: “Maybe investors will think, we won’t go to Dubai but we’ll come here because this is where we can do business for this market.”
A senior monetary official in Riyadh says that efforts to encourage locally based investment banks, other institutions and funds were intended to reduce the influence of “suitcase bankers” on the kingdom.
Cross-border attractions
Sceptics suggest that Saudi Arabia’s belated attempt to establish a financial centre may not elicit the desired stampede of firms looking to set up shop. “Having one more financial centre in the region won’t necessarily prove that much more attractive to investors,” says one local analyst.
Financial barriers between the Gulf Co-operation Council (GCC) states are gradually being dismantled anyway and a single GCC stock exchange may not be long in coming. The GCC is to establish monetary union by 2010, which could remove the necessity to have a physical footprint in the Saudi market – particularly when other Gulf states offer a more convivial lifestyle package to expatriates.
The Saudi authorities acknowledge that bricks and mortar alone will not attract the blue chips. Negative perceptions of the restrictive lifestyle in Saudi Arabia, as well as heightened security risks, will have to be overcome if the KAFD is to meet its ambitious targets. On the other hand, the project’s sponsors recognise that local demand for prime city centre real estate will ensure a strong level of interest – even if it is at the cost of being seen as a Dubai-style ‘property play’.
International players will adopt a wait-and-see approach, with the terms for private developers yet to be worked out in detail.
Capital markets reform
Confidence levels will be bolstered by Saudi efforts to reform the capital market. The need for reform has been brought into sharp relief by the massive fall in the Saudi Stock Exchange (Tadawul) in the first half of the year. In February, the bourse lost 30% of its capitalisation in two weeks. By May, the CMA had lost its chief, Jammaz al-Suhaimi, as the slide continued unabated.
Although the stock market has recovered some ground since June, volatility continues to plague the Tadawul All-Share Index (Tasi). Aware that the CMA has failed to make the necessary progress on regulatory reform and financial liberalisation, the CMA’s new head, Abdulrahman al-Tuwaijri, announced in late May a series of measures to drain the poison from the system. The measures include the establishment of a new stock exchange system, the formation of a new stock market company and a rationalisation of the initial public offering (IPO) pipeline. The new Saudi Arabian Financial Exchange (Safe) will be relocated to the KAFD, where it will act as a flagship institution.
A share split has helped to increase the attractiveness of stocks that were otherwise very highly priced, while Mr Suhaimi’s removal placated a number of investors who had been calling for his resignation, however unjustified that may have been. “The market needs to realise it’s getting back its confidence, and the share split will help a lot,” says Mr Zahid.
Market supervision
By mid-July, the Tasi had found a floor around the 12,000-13,000 line. But more reform will be needed to shore up the battered Saudi capital market. Besides improved investor education – the estimated half a million Saudis that were hit hardest by the bourse’s collapse were first-time retail investors – the CMA regards improved disclosure requirements for listed firms and generally more robust market supervision as the key to restoring the Saudi stock market’s fortunes.
It would also right some past wrongs. Amid rampant demand for shares last year, the authorities lifted the normal precautionary requirements for firms seeking new listings. “The announcement of improved disclosure requirements was a good move, but it’s a work in progress – the key is in the implementation,” says Mr Zahid.
The stream of IPOs has temporarily abated as the market seeks to regain a semblance of stability. But the long-term structural health of the market demands that the government put greater emphasis on divesting further state assets for sale via public subscription on the local bourse.
Rolling out IPOs in state companies would help to mop up much of the excess liquidity swilling through the Saudi economy. “One reason the market went out of control was that there was not enough supply of shares on the market, despite huge demand. Once the market has stabilised, they need to get back to IPOs,” says Mr Zahid. “This is the largest economy in the region and it makes no sense that there only 75 companies on the stock market.”A RANGE OF NEWCOMERSThe Saudi banking environment is filling up with a range of newcomers, from major international banks that have recently been allowed to set up operations in the kingdom to a new state-controlled development bank, which will potentially be such a big institution that local bankers fear its emergence might skew the market, harming longer established banks.Incomers include Deutsche Bank, which launched its brokerage on the Saudi Stock Exchange (Tadawul) only a month after opening its first bank branch. Ricardo Honegger, Deutsche’s head of global markets Middle East and North Africa, said this “marks the first time a broker from outside the region has become a full member of the [GCC’s] largest stock exchange”. Saudi Arabian Monetary Agency (Sama) has granted Deutsche a licence to offer a full range of investment banking, asset management and wealth-management services.Tadawul regulator, the Capital Markets Authority (CMA), is licensing an increasing number of brokers and investment banks, to increase liquidity and levels of expertise in the market. The pace of this process has quickened as the authority responds to the crash that has erased more than half of the Tadawul’s capitalisation since late February. The authority has granted banking licences to HSBC, which is establishing an investment bank (see The Banker, April 2006), BNP Paribas and Credit Suisse. It plans to issue a few more, including to Japan’s Nomura. Some larger regional institutions are also entering the country, although this will be limited to a few more credible institutions, a monetary source told The Banker. Lebanon’s Audi Saradar Group and Egypt’s EFG-Hermes Saudi Arabia have licences to establish investment banking units. And National Bank of Kuwait opened a Jeddah branch in early May. Omani brokerage National Securities Company is looking to establish a Saudi venture and the sultanate’s biggest bank, BankMuscat, expects to establish a Saudi branch in the second half of this year. Development bank debateThe foreign influx will stimulate competition in a sector where locally based banks have long lived in a comfort zone – highlighted in recent weeks by most institutions reporting huge increases in profits for first half 2006. Nevertheless, the government intends to remain a big player in the market, underlined by its plans to launch a new development bank within the next year. The bank is due to be launched with a huge initial public offering (IPO), which was planned for recent months but was delayed by the Tadawul downturn.The development bank could prove a powerful tool in mobilising longer term infrastructure financing. However, some Riyadh bankers fear that it will divert significant retail and corporate business away from the traditional providers. The planned IPO is expected to be priced at a level that will tempt millions of small investors back into the market, which has started to strengthen again after the traumas of recent months. The government has indicated that it might float an unprecedented 70% of the development bank’s SR15bn ($4bn) capital, giving it almost the combined paid-up capital of the top two local banks, National Commercial Bank and Al-Rajhi.
