Things change slowly in Saudi Arabia, if they change at all.
The country has long defied foreign investors who would try to
guess its next move. Like a mirage, Saudi Arabias promise
be it lucrative construction contracts or the chance to
invest in cash-rich companies taunts thirsty believers
before disappearing into the desert sand.
Change comes particularly slowly in the realm of Saudi
finance. In the time it took its upstart neighbors Dubai and
Doha to build entire cities, Riyadh has managed, after many
fits and starts, to pass a mortgage law to allow its own
population to buy homes on credit. Those who have faith that
the Saudis will one day open their equity market to foreigners
are especially patient souls. At a time when the capital
markets of the United Arab Emirates and Qatar are angling to
get an upgrade to MSCIs emerging-markets index, the Saudi
stock market, the Tadawul, remains sealed off from direct
But foreigners and Saudis are used to reading signs, and
lately they find fresh reason for optimism. The replacement of
a key figure, a board reshuffle, even an eerie silence on a
once-hot issue these are often the harbingers of change
in Saudi Arabia. The recently adopted mortgage law, for
instance, was seven years in the making. After repeated hints
and rumors failed to pan out, most observers had given up hope
of seeing the measure adopted then, suddenly, the
kingdoms Council of Ministers enacted the law last July.
Such is the nature of change in the Gulfs biggest, and
most opaque, economy.
In my experience of being in Saudi, when things go
quiet on the reform front for a while, they usually then
accelerate pretty quickly, says Farouk Soussa, chief
economist for the Middle East at Citigroup in Dubai.
Ever since the government established the Capital Market
Authority in 2004 to regulate the countrys stock market,
tongues have been wagging about the prospect of opening the
Tadawul and its $380 billion worth of companies to foreign
investors. For Saudi watchers the latest sign was the February
appointment of Mohammed Alsheikh as CMA chairman, replacing
Abdulrahman al-Tuwaijri. Alsheikh has an impressive
résumé. A veteran lawyer with a master of laws
degree from Harvard Law School, he spent nearly two decades
representing sovereign wealth funds, governments and banks in
Saudi Arabia; worked as the local partner of U.S. law firm
Latham & Watkins; and last September was appointed by the
government as Saudi Arabias executive director at the
World Bank. Alsheikhs experience and government
connections make him a good candidate to see through a
liberalization of the Tadawul, says Said Hirsh, an independent
financial analyst in London and a former economist at Capital
Economics. He cautions, however, that the ultimate authority
rests with the House of Saud, led by King Abdullah.
Most analysts and commentators get overexcited with
changes in official Saudi positions, Hirsh notes.
The question is, is there consensus at the top level? If
there is, then Alsheikh appears to be a good person to deliver
For now, the Tadawul remains dominated by retail investors,
who generate a staggering 95 percent of trades. The reason is
simple: A generous welfare system flush with oil revenue leaves
most Saudis with money to put to work, and the kingdom offers
little else in the way of investment opportunities.
Mohammed al-Omran, a financial analyst and president of the
Gulf Center for Financial Consultancy, in Riyadh, says Saudis
have only two real investment options: the capital markets and
the property market. Considering that Saudi cities have some of
the highest land prices in the world and that homes are in
short supply, the markets usually win out.
We dont have bonds or mutual funds, and with the
ease of buying online, almost everyone has stock market
investments, says Ahmed al-Zahrani, a day trader and
director of private sector programs at the Riyadh-based
Institute of Public Administration. There are only 150
companies in the market, so people think the choices are
limited and they dont need to go to a broker.
The preponderance of retail investors means that although
the market has liquidity, there is little depth. There are
three government-sponsored institutional funds with total
assets of 428 billion riyals ($114 billion), but they
are passive investors and add little to trading values. The
largest, the Public Investment Fund, has holdings worth
303.8 billion riyals, including stakes of 5 percent in 18
companies, according to NCB Capital, a Riyadh brokerage. The
only way for foreigners to play the Tadawul is through equity
swaps and exchange-traded funds, which account for less than 5
percent of trades on the Tadawul, estimates Hirsh.
Its the biggest market in the Gulf Cooperation
Council, but it has been pretty much sideways for the past
three years. People just put money in and take it out. For
three or four months, it is active, and then it just
slumps, says an equity analyst at brokerage Al Rajhi
Capital, in Riyadh, speaking on condition of anonymity.
The coming of foreign and institutional investors would
boost those volumes and give the index a direction, which is
imminent is a market opening? Market watchers inside and
outside the country are divided on the question. It
doesnt help that CMA officials rarely go on the record.
Alsheikh has not spoken publicly since taking over at the
Citigroups Soussa is optimistic, saying that he
expects the authorities to admit foreign investors to the
Tadawul sometime this year. Others are more cautious. Saud
Masud, a longtime Saudi watcher who heads his own, New
Yorkbased investment consulting firm, SM Advisory Group,
believes liberalization wont take place until 2014 or
It has been known as the sleeping giant, the last
believer, Masud says of Saudi Arabia. The UAE and
Qatar have always looked for that edge, that way of defining
themselves, but Saudi didnt have to do that. I think
Saudi Arabia is getting pretty tired of being known as the
country that cant keep up with the times.
In many ways, the time is ripe for opening up the market.
The Arab Spring is more than two years old, and worries about
the potential for uprisings in the Gulf region have largely
receded. Civil war may be raging in Syria, and the Muslim
Brotherhoodled government in Egypt is having trouble
restoring order and reviving that economy, but Saudi Arabia and
its Gulf neighbors appear to be bulwarks of stability.
The Saudi economy is pretty robust too. Firm oil prices are
keeping the governments coffers full and the current
account in surplus to the tune of more than 25 percent of gross
domestic product, according to the International Monetary Fund.
A rising population of some 28 million people a
majority of whom are under 30 and looking to start families and
buy homes is fueling domestic demand in the nonoil
sector. The IMF forecasts that the economy will grow by 4.2
percent this year, down from 6 percent in 2012 but still one of
the fastest rates in the Middle East.
You are not going to get better market conditions than
now, Masud says.
Although the macroeconomic circumstances may be attractive
to foreign investors, the Saudi market has a number of
structural issues that could limit potential capital
Unlike those in most frontier markets, almost every company
listed on the Tadawul is tightly controlled by either its
founding family or the state. Saudi Arabia Basic Industries
Corp., the giant petrochemicals company that is the bluest of
the countrys blue chips, is 75 percent-owned by the
government; the market float is just 25 percent. The numbers
are even starker at Kingdom Holding Co., the investment
conglomerate of Prince Alwaleed Bin Talal. He retains ownership
of 95 percent of the company, leaving just 5 percent to the
market. Even smaller companies tend to be tightly held. Jarir
Marketing Co., the countrys leading retailer of
stationery and computer products, has less than 40 percent of
its stock trading in the market; its founders, the al-Aqeel
family, retain the rest. As a result of this market structure,
there is not a lot of stock available for outside
This shortage of stock helped fuel a powerful rally a decade
ago. Between 2003 and early 2006, the Tadawul All Share Index
climbed 700 percent, to a peak of 20,635 in February 2006. With
the markets price-to-earnings ratio hitting a high of 40,
analysts warned that Saudi stocks were overvalued. (By
comparison, the S&P 500 index was trading in late March at
about 14 times estimated 2013 earnings.) The correction was
swift and brutal. The index plummeted to end 2006 below 8,000,
slashing the total market capitalization by more than half, to
about $320 billion from $800 billion. Saudi
investors, many of whom had borrowed heavily from banks to get
in on the rally, sold in panic. They blamed the government for
not doing enough to cool down the market and for openly
encouraging investors to buy stock during the boom.
Investors are not eager to see the market ride that roller
coaster again, but neither do they appreciate its lackluster
performance of late. The Tadawul has remained stagnant at under
7,000 points, except for a brief rally in 2012 that brought it
close to 8,000 for a short time. Valuations, on the other hand,
are much more reasonable: Stocks were trading in late March at
an average of 13.3 times earnings.