Oil eases investors past Saudi’s regulatory risks

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Blue chip stocks such as SABIC dominate Saudi Arabia’s bourse.

And it was Gulf neighbour Bahrain who first made public the problems at a Manama unit of unlisted Saudi firm Ahmad Hamad Algosaibi and Brothers Co (AHAB), urging shareholders to meet over debt restructuring — the Saudi parent stayed mum for weeks.

Abdulhamid Al Amri, a member of the Saudi Economic Association think tank, said it was too easy for firms to hide the size of debts or levels of cashflow due to lax disclosure.

“At the time when Sanea was getting loans, there was strong competition among banks for loans. It got out of control...many banks exceeded the regulatory 80 percent loan-to-deposit ratio.”

A few local speculators dominate the Arab world’s largest bourse, with blue chips such SABIC and the index often sharply rising or falling without any fundamental reason.

Company statements are made only in Arabic with stocks often moving beforehand — with the exception of Kuwait all other Gulf bourses also release corporate filings in English.

Oil trading just below seven-month highs of $70 a barrel in a sense masks the problem.

“As access improved, we would expect further gains in the Saudi market so long as oil prices remain reasonably strong,” Merrill Lynch said in a note.

The biggest Arab economy has unveiled plans to set up a bond market, while analysts also expect the bourse to be fully open one day — investors now need a Saudi intermediary to trade.

Banks such as UBS, HSBC and JPMorgan Chase have arrived, covering Saudi stocks, the economy or offering investment banking services. Abraaj Capital, the Middle East’s largest private equity firm, just opened a Riyadh office.

Firms such as SABIC or Saudi Islamic banks have appeared in international research notes.

Growth prospects are seen to be strong as the Saudi bourse has been relatively sheltered from global turmoil. The biggest Islamic lender Al Rajhi Bank trades at 14.7 times its 2009 earnings compared to 9.6 for Akbank, Turkey’s biggest bank, according to Reuters data.

One positive is that some investors feel that efforts are being made to bring the Kingdom’s regulatory standards up to scratch.

“Investor relations is a new concept to Saudi companies...[but] with international investors flocking in to this market, companies are becoming more and more aware of the concept,” said Rami Sidani, head of Middle East and North Africa at Schroders, which is also upbeat about Saudi stocks.

The government has moved to reform commercial laws for Saudi Arabia’s entry to the World Trade Organisation (WTO) in 2005 but Muslim clerics suspicious of changes still dominate the courts.

“Transparency is less developed than in other Gulf states but this doesn’t mean it is impossible to invest there,” said Ebner at Frankfurt Trust.

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