We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Thu 3 Nov 2011 04:09 PM

Font Size

- Aa +

Saudi ripe for Chinese-style stock market opening

Opening door to foreign investors would help line domestic pockets in Gulf state

Saudi ripe for Chinese-style stock market opening
Saudi Arabia has said it plans to open its bourse to foreign investors

Saudi Arabia is ripe to open its doors to foreigners. Kingdom
watchers expect that the $330bn stock market will be made more accessible early
next year. Riyadh may follow China's model of granting licences to
"qualified foreign institutional investors". The move isn't without
risks. But letting outsiders in would, at worst, line domestic pockets and, at
best, help Saudi to build a stronger private sector.

Foreigners have been able to buy into the largest stock
market of the Arab world since 2008, through swap agreements. But these are
expensive and don't come with voting rights. Add in the global financial crisis
and it is little wonder that the timid opening failed to win much enthusiasm.
Investors from outside of the Gulf Co-operation Council account for around just
2 percent of the entire market.

A bolder liberalisation would expose Saudi to the risks of
hot money flows. To fend off the unwanted consequences, China has set a
ceiling, currently around $21bn, giving the central bank some predictability
over capital flows. For the kingdom, that would limit pressure on the currency,
which is pegged to the dollar. A Chinese-style system would also allow Saudi to
keep out unwanted investors, like the Iranians, and limit their ability to
invest in certain sectors, for example, real estate in the holy cities of Mecca
and Medina.

Institutions may even bring stability to the volatile
Tadawul, the stock market, where retail investors are quick to sell when faced
with the opportunity of a new, attractively-priced, listing. There was a small
net inflow of foreign investors in February as the Arab Spring unfolded. And as
Jadwa Investment point out, Saudi-listed companies now generate 43 percent of
their revenues from abroad compared to 30 percent in 2005.

Letting outsiders in would also provide an easy boost to the
market, which has yet to regain its 2006 lustre, when an IPO-led boom saw
shares peak at three times their current levels.

The market currently doesn't suffer from an unmet demand for
capital. But opening up would, over time, improve transparency and make it more
efficient. That would help efforts to develop the private sector, which
currently accounts for one third of GDP, and needs to grow to reduce
unemployment and alleviate the burden on the state.

(Una Galani is a Reuters Breakingviews columnist. The
opinions expressed are her own)

Arabian Business: why we're going behind a paywall

For all the latest market news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Real news, real analysis and real insight have real value – especially at a time like this. Unlimited access ArabianBusiness.com can be unlocked for as little as $4.75 per month. Click here for more details.