Saudi bourse not ready for foreigners

NOT READY: Saudi needs to boost transparency and deal with massive domestic liquidity before opening up its market to foreign investors, speakers said. (Getty Images)

Saudi Arabia should boost transparency and deal with huge levels of domestic liquidity before allowing direct foreign ownership in its bourse, speakers at an investment conference said on Tuesday.

The world's largest oil exporter is following a gradual and cautious process in allowing foreigners into its stock exchange, the Arab world's largest.

"We live in a country where wealth is held by the state, so IPOs and the bourse are good ways to distribute it to [Saudi] retail investors," Mutlaq Al-Morished, chief financial officer (CFO) of state-controlled Saudi Basic Industries Corporation (Sabic), said at the conference in Riyadh.

Foreign institutions and individuals from outside the six-nation GCC are allowed to invest in the Saudi bourse only through funds holding Saudi stocks.

Their interest has been growing after the crash of February 2006 which wiped out more than half the market's capitalisation.

"We are seeing strong and aggressive interest from foreign institutional investors," Osama Shaker, managing director and head of investments at HSBC Saudi Arabia, told the conference.

"They either enter the market through mutual funds or by using the GCC as a backdoor," he said.

While keeping initial public offerings (IPOs) exclusively open to its 17 million native population, Riyadh allowed resident expatriates to buy listed shares in 2006 after the crash started and opened the market to investors from the GCC last year, under an economic integration plan.

But 90% of the market is still held by Saudi retail investors, said Teofilo Masera, head of investment banking at Morgan Stanley Saudi Arabia.

While local investors' appetite for new issues waned after the crash, as shown by a drop in both IPO oversubscription rates and daily traded volumes, Riyadh has been struggling to find ways to manage rising liquidity from record oil receipts amid a surge in inflation.

"There is already huge liquidity without letting foreign investors in... Let's deal with this liquidity issue first, and then we'll see," Al-Morished said.

Sharp volatility is a main feature of the Saudi market, because the average investor understands little how the bourse works, many listed companies do not observe corporate governance and research about listed firms is very thin, the speakers said.

"Very few firms are rated... People do not read... and we lack research analysts: Only one [Saudi] bank has a real team of financial analysts," Al-Morished said.

A significant number of retail investors take their cues from dozens of internet chat rooms dedicated to the stock market or to SMS messages they receive from sometimes anonymous and unlicensed senders who portray themselves as fund managers.

Like others in the Gulf Arab region, Saudi Arabia's market has been tainted by allegations of insider trading and manipulation of stock prices, and the market regulator has slapped hefty fines on many investors it found guilty of fraud.

Abdulkareem Abu Alnasr, CEO of National Commercial Bank (NCB), the kingdom's largest bank by assets, voiced reservations about opening the bourse to foreign investors, citing fears about hot money.

Al-Morished agreed. "What happened in southeast Asia has taught everyone a lesson about opening up too soon," he said.

HSBC's Shaker said the level of disclosure must be strengthened. "We have some housekeeping to do before opening to foreign investors... How long will it take? Only God knows," he said. (Reuters)

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