Saudi's great stock market exchange

Earlier this month, the government of Saudi Arabia approved the conversion of the kingdom's stock exchange, Tadawul, into a state-owned joint stock company, paving the way for an eventual initial public offering (IPO) of the Arab world's largest stock exchange.

The new company, Saudi Financial Market Company - Tadawul, is expected to have a capital of SAR1.2 billion ($320 million) and will be wholly owned by the state's Public Investment Fund (PIF).

Abdulrahman al-Tuwaijri, head of the Capital Market Authority (CMA), said that the Tadawul's incorporation was a logical step and is a "decision that goes in line with international stock markets". In November, neighbouring Dubai's stock exchange became the first in the Arab world to sell its own shares in a public and private issuance, which saw the emirate sell a 20% stake.

The local media report that PIF will initially own all 120 million shares of the new entity. A government statement said that eventually part of the stock will be offered in an IPO "at a date decided by an extraordinary meeting of its [Tadawul's] general assembly." This is in keeping with the government's efforts to increase public participation in newly formed and privatised entities. For example, 13 newly licensed insurance companies have been required to publicly offer a percentage of their stock as part of their agreements.

The company will continue to operate the kingdom's sole exchange, which is based in Riyadh, and will carry on all the duties of its predecessor. It will manage the trading of stocks and bonds, registration of ownership and publication of information about publicly traded companies. A board has yet to be announced.

"The measure aims at separating the legal, organisational and regulatory responsibilities to improve the trading climate on the market," said Tuwaijri. Under the former arrangement, the market was effectively operated as a department of the CMA.

Tuwaijri said the new company is expected to improve the efficiency of trading mechanisms in terms of settlement, deposits and clearing as well as the overall transparency of the market. He said that the company was planning on implementing a new system to assist in this.

The decision appears to complement an overall drive to increase the sophistication of the securities environment in the kingdom, which has recently seen banks lose their monopoly on brokerage with the introduction of new broking licenses. They are also being forced to split their investment banking away from commercial operations. It is hoped that this will help encourage greater institutional involvement in investment activity to improve both professionalism and investor maturity.

Saudi Arabia's bourse lost almost 53% last year under strong correction pressure, following seven years of continuous rise. Today, trading on the kingdom's exchange remains flat.

One Riyadh-based market professional told Oxford Business Group he believed investor sentiment was suffering not only the bruising of last year's crash but also from declining oil prices and speculation over a showdown with nearby Iran along with continued uncertainty over the situation in Iraq.

For the moment, the Saudi market remains driven by retail investors, the majority of whom invested in the rallies of late 2005 when returns of 20% were common. It is this majority, hit hardest by the market correction in February 2006, who remain reluctant to start trading again.

While the exchange closed trading last week above the psychologically important 8,000 mark at 8,603.10 points - 7.9% up on the year to date - the CMA has come under pressure for what happened last February and the subsequent ongoing slump. IPOs continue to attract interest, although the secondary market remains weak.

An additional concern is speculative stock trading, which has led to damaging mini-corrections. Speculative stocks are those that are considered high risk relative to their potential return. Saudi economists say that almost 60% of Saudi investors are small dealers who depend heavily on speculation. Whenever a decline happens, as it did earlier this month, they try to exit, causing the market to slide.

Riyadh-based Bakheet Financial Advisors warned in a recent weekly report, "This poses the biggest threat to the market through increasing investors' anxiety, including blue chip shareholders."

(C) Oxford Business Group - www.oxfordbusinessgroup.com

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