On Monday, Saudi Arabia finally allowed its $590 billion market capitalisation stock market to be accessed by foreign investors. In fact, one year ago, it had been announced by the government that the access to the market would have been occurred in the near future. This measure not only represents a relevant turning point in Saudi Arabian relationship with the rest of the world, but also a positive example to other Middle-Eastern countries that have not yet opened themselves to the world.
Since the beginning of its economical growth of considerable magnitude, Saudi Arabia’s GDP has been strongly determined by the income from its primary export, oil. As all the other oil-based economies of the world, indeed, this economical system is destined to face a decline in the medium term, decline which has already began showing in some countries more than others, due to the impoverishment of the sources of hydrocarbons, a process that will culminate in the extinction of the oil market, eventually.
Not coincidentally, over the few last decades, the most forward-looking countries, including Dubai, Abu Dhabi and Qatar, have begun diversifying their economies, implementing new sources of economical wealth, as, for instance, tourism, luxury manufacturing, building and estate. Since 2010, Saudi Arabia has started diversifying its economy, showing an annual rate of development at 6%.
Saudi Arabia is the nation with an abundance of oil reserves in the world and it has the most dominant stock exchange in the six-country Gulf Cooperation Council (GCC), so a measure like this opening was just a matter of time, in terms of empowering its economy and actually unleashing its entire potential. In the last few years, indeed, this market had shown a distinctive potential thanks to its high level of trading activity and great diversity of sectors of offer, having today almost the same size of the Russian Stock Market.
This opening to foreigners, which takes place thanks to the will of imitating the successful strategy of Dubai, Abu Dhabi and Qatar mentioned above, enhances a further manner of liberalisation and diversification of the economy, since it will bring billions of dollars in terms of new, fresh investment, encouraging a further expansion of the sideward market during the eventual oil market decline.
The Saudi Arabian market represents a healthy market for IPOs, with a strong potential of development and an encouraging expectation of expansion. This one is, in fact, the largest and most liquid market in North Africa and Middle East region, and represents a further opening of the Arabian Gulf’s economy. There have been set some restrictions to the investments, though, in order to ensure some important, safe standards in this delicate process.
The investment operations are reserved only to institutional investors, which present themselves as trustworthy and consolidated in success, having at least $5 billion in assets and being present in the market over the last 5 years. Furthermore, there is a limitation in the percentage of shares acquirable by foreign investors; no more than 5% of shares in any company for each investor, no more than 49% of foreign investors can constitute the shareholdings of each company. However, those that can’t be qualified as institutional investors can still take part in the investment process through a swap agreement program, but will not appear as regular shareholders and will not have voting rights.
Moreover, the Saudi stock exchange may be included into the MSCI Emerging Markets Index within a few years, process which will likely bring relevant benefits to all the early investors in this market.