JEDDAH — There is understandably significant interest in and excitement about the opening of Saudi stock market to direct investment by foreigners today (June 15) being the largest and most liquid market in MENA, Emirates NBD Research said. Saudi Arabia is the biggest economy in the GCC, and the 19th largest economy in the world, with a nominal GDP of $753 billion in 2014. It is also the most populous nation in the GCC with 30.8 people, more than half of which are under the age of 30. With the second largest proven oil reserves in the world, oil remains a key driver of economic growth in Saudi Arabia, with the hydrocarbons sector accounting for over 40 percent of GDP last year, up from 33 percent of GDP in 2004. Moreover, hydrocarbon revenues account for around 90 percent of total budget revenues and have thus been the main driver behind the substantial fiscal surpluses that have been accumulated over the last decade. The sharp decline in oil prices since last summer have had an immediate and significant impact on the fiscal position. The 2014 budget recorded the first deficit in 12 years, at –SR65.5 billion (-2.3 percent of GDP), and the deficit is likely to have widened this year to around 12 percent. “However, the government has ring-fenced funding for major infrastructure projects and we expect those projects already underway to continue,” the study said. The emphasis in recent years has been on developing transport, housing, education and healthcare infrastructure, including the construction of thousands of kilometers of roads, new schools, universities, hospitals as well as expansion of ports, airports and railways. The 2015 budget allocated substantial funds for education, healthcare and social services infrastructure. SAMA's net foreign assets (NFAs) declined by -$45.5 billion in the year to April. However, the stock of NFAs remains substantial, at about $678 billion, or 90 percent of GDP, which provides a substantial cushion against low oil prices and should allow the government to avoid an immediate, sharp fiscal consolidation, which would have a negative impact on economic growth. Furthermore, Saudi Arabia has no external public debt, and the stock of domestic debt is low at just 1.6 percent of GDP (2014). It is from an external balance perspective that the decision to open the Saudi equity market to direct foreign investment is timely. The Kingdom has run a current account surplus since at least 2006, mainly due to oil revenues. The current account surplus narrowed to $75.6 billion in 2014 from $134.2 billion in 2013, both on the back of lower oil revenues and a higher deficit on the services balance. In 2015, the study forecast a current account deficit of -$13.7 billion (-2.0 percent of GDP). An increase in portfolio investment following the opening of the equity market, while by no means necessary, would help to offset the current account deficit. Although growth is expected to be slower in 2015 – “we conservatively forecast growth of 2.5 percent - the Kingdom has strong fundamentals including low debt, substantial accumulated reserves and a young and growing population. The Tadawul is the largest stock market in MENA, and the seventh largest in the global emerging market (GEM) universe, with a market capitalization of $570 billion. With an average daily value traded of around $2.5 billion, it is the fourth most liquid market among its GEM peers.” However, Tadawul has not been included in the MSCI Emerging Markets Index because of the restrictions on foreign ownership. Opening the market to direct investment by foreigners removes the last hurdle towards being included in the MSCI Emerging Markets index. According to market estimates, if included, Saudi Arabia could hold a weight of as much as 4.4 percent in the MSCI Emerging Market index, which could translate into around $5 billion of inflows into the Tadawul. Foreigners currently own an estimated one percent of the market. If the total foreign ownership in Saudi Arabia were to increase to five percent, the equivalent of the average foreign ownership level in the UAE and Qatar, then that could translates into inflows of around $25 billion, the study noted. In order to qualify as a Qualified Financial Institution (QFI), the applicant or any of its affiliates must have a minimum of five years of related experience and have at least SR18.75 billion worth of assets under management (AUM). The CMA reserves the right to reduce the minimum threshold for AUM to SR11.25 billion. Each QFI will be able to hold up to 5 percent at an individual company level and the aggregate position in the market level (including any SWAP position) has been capped at 10 percent of total market value. The CMA has explicitly mentioned that strategic investors will be accounted for in the maximum allowed foreign ownership limit of 49 percent. The regulator also said that it will consider allowing foreigners to participate in IPOs on a case-by-case basis. The regulator has also approved the Independent Custody Model which in effect separates the role of the custodian and the broker and allows QFIs to place orders with multiple brokers without the need to maintain separate cash accounts with each broker. The QFIs will be subject to the five percent withholding tax on dividends which will be collected by the company. The current settlement cycle of T+0 will continue and hence all transactions by QFIs will need to be pre-funded, the Emirates NBD Research said. The aggregate QFI limit for all stocks listed on the Tadawul is 49 percent. However QFIs are barred from investing in Makkah Construction & Development, Jabal Omar Development, Taiba Holding, Knowledge Economic City and National Shipping Co. — SG/Agencies
