Why Saudi Arabia’s Capital Market Authority (CMA) inspires conﬁdence among the GCC’s small shareholders.
In the midst of the doom and gloom of the past 12 months, one market seemed to have bucked the trend and carried on with business as usual. Saudi Arabia, a member of the World Trade Organisation and an invitee to the G20 summits in Europe and North America, has an active stock market with millions upon millions of investors and is probably reliant on exports even more than many other emerging and developed economies. In fact, its very primary source of earning foreign currency has taken a beating recently and has crashed by over 60 per cent. Oil prices tumbled from over US$147 recorded in July 2008 to US$34 earlier this year. What then can explain the fact that the Saudi stock market has outperformed all the region’s indices?
Considering the global ﬁnancial crisis, it will be challenging to pinpoint one speciﬁc reason for the superb performance of the Saudi stock market, which rallied by over 36 per cent from March to June and had recorded a 16 per cent year-to-date performance at the time of writing this article. Rather, it is a combination of forces, events and legislation that have allowed what many perceive to be a closed economy to ﬂourish when ﬁrst-rate capitalist economies are ﬂoundering.
Exactly 12 months ago, the CMA, the country’s stock market regulator, allowed greater access to foreign investors by allowing swap agreements for the ﬁrst time. Still, foreign investors only account for 0.2 per cent of investments in the Kingdom’s stock market, although it is likely that the ﬁgure would be higher if expat residents in the Kingdom and GCC citizens were included. Also, a survey conducted by Dubai-based bank Shuaa Capital last May showed that 60 per cent of the investors polled believed that the bottom of the cycle for the Saudi stock market had been reached already. Finally, last June, the CMA agreed to set up a market for debt securities, effectively creating a bond and Islamic sukuk market in the Kingdom.
Another reason for the surge in the stock market was the fervent IPO activity. A total of ten IPOs have been conducted in the past few months, including several insurance companies such as Al Rajhi Insurance and chemical ﬁrms such as Petrochem, which has yet to list. The pipeline for IPOs is the longest and the most signiﬁcant of any market in the region. More than a dozen other ﬁrms are expected to go through an IPO, including giants such as Sahara Petrochemicals and Sabb Takaful. Other IPOs that have been given the green light include Saudi Airlines, which, regardless of the fact that it is less glamorous than its sister airlines in the GCC, carries hundreds of the thousands of pilgrims to the holy city of Mecca. An IPO will only mean that it will have to streamline its corporate governance and close the loopholes that have caused it to lose money in the past.
A close look at the Saudi stock market performance graph will indicate that it greatly resembles the movement of the Brent crude oil index in the past few months. This is a two-edged sword, of course, since oil has been one of the most volatile commodities available. However, a McKinsey report found that the Saudi Arabian Monetary Agency increased its assets to US$390 billion in 2008 from US$350 billion in 2007, due to ﬁxed-income investments. These funds will help cushion the economy that is weathering the oil price volatility.
One of the most important factors that have contributed to the surge in the Saudi stock market index could probably be attributed to the stock market regulator. Unlike other regulators in the region that promise more than they deliver, Saudi Arabia’s CMA has surprised many with its courage and transparency in dealing with market manipulators.
In June, the CMA ﬁned, named and shamed a major local investor and shareholder in several listed companies for insider trading. Mohammed bin Ibrahim Al-Issa was ordered to pay SAR100,000 (US$26,667) for “insider trading in shares of Saudi Hotels Co. based on his membership of the company’s board”. Al Issa was also ordered to pay back all the proﬁts generated as a result of insider trading that amounted to SAR3.37 million. The Saudi Economic Associated think tank estimated that he is the third-largest investor in the Kingdom’s stock market after Prince Al Waleed Bin Talal and Suleiman Al Rajhi6. That, and a further 92 similar cases being probed by the CMA, have doubtless sent a clear message to all other investors that insider trading will not be tolerated further, boosting retail investors’ conﬁdence.
If only the CMA could regulate other markets in the Gulf.
This article was originally published in MONEYworks on August 2009.