By Nicolas Parasie
DUBAI--Saudi Arabia on Monday laid down the final rules for the
long-awaited opening of its $590 billion stock market to
foreigners, allowing only large institutions to invest in one of
the last major bourses to have remained mostly shut to
international investors.
The rules, which take effect on June 1 ahead of the market's
planned opening on June 15, permit only qualified foreign investors
such as banks, brokerages, fund managers or insurance companies
with at least $5 billion in assets under management to invest in
the Middle East's biggest market.
Saudi Arabia last year signaled that it would allow direct
foreign purchases of stocks to promote institutional investments in
a market largely dominated by local retail investors, a move that
would help reduce the high volatility there and also improve the
corporate governance practices of traded companies.
The market's opening to large institutional investors will
likely bring in hundreds of millions of foreign cash, boosting the
Saudi economy as it copes with the impact of low oil prices, its
main source of revenue. The kingdom's foreign reserves have dropped
by $36 billion, or 5%, over the past two months as it maintains
government spending plans despite lower oil-sale income.
Foreign investors until now had only limited indirect access to
the Saudi market through instruments such as swaps.
"The Saudi approach to opening its market has been a pragmatic,
considered and robust exercise and in that sense is not in our view
materially different from the way other emerging economies have
handled similar exercises," said Jamal Al Kishi, the chief
executive officer at Deutsche Securities Saudi Arabia.
"The $5 billion threshold is broadly considered a reasonable
level to allow for an orderly opening up of the market. It seems to
be aimed at achieving a manageable launch process and to ensure
strong credibility of new market participants by only allowing
investors with scale to initially participate," Mr. Kishi
added.
Some of the world's largest asset managers such as BlackRock,
Franklin Templeton and Schroders, whose assets under management
easily surpass the minimum levels stipulated by the Capital Market
Authority, will likely qualify to buy Saudi stocks. It isn't
however clear which international institutions are planning to
invest in the Saudi market.
But the $5 billion minimum requirement also excludes a vast
number of smaller asset managers, typically those that track
frontier markets, from directly investing in the Saudi stock
exchange.
Saudi Arabia is expected to be classified by 2017 as a frontier
or emerging market by index compilers such as MSCI Inc., which are
tracked by global funds managing billions of dollars.
Several analysts and fund managers had hoped that the regulator
would lower the bar for the minimum requirements, something Saudi
Arabia could still consider in the future. The CMA said it may
reduce the minimum assets under management threshold to $3 billion,
but didn't clarify further.
The Saudi rules also impose restrictions on how much outside
investors can buy. For example, foreign investors are forbidden
from holding more than 10% of the combined bourse's market value at
any time. Similarly, foreign ownership of a single company is
restricted to 49%. A single investor also isn't allowed to own more
than 5% of a stock.
"The 'opening up' of the Saudi market is likely to be an
incremental process, with this being the first small step," said
Zachary Cefaratti, risk officer at Dalma Capital, a Dubai-based
asset manager. "Like the floodgates of a dam, once markets are
opened, it becomes much easier to open them further than to close
them back up," he said.
Opening the Saudi bourse, or Tadawul as it is locally known,
will give foreign investors access to some of the world's biggest
corporates. such as petrochemical giant Saudi Basic Industries
Corp. or dairy company Almarai.
Saudi stocks are among the best performers in the Middle East
this year, up about 17% to date.
Ahmed Al Omran in Riyadh contributed to this article.
Write to Nicolas Parasie at nicolas.parasie@wsj.com
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