OT: Saudi Arabia Stock Market.
There is some evidence that the tradition of equity prices being linked to oil may be coming to an end
Financial Times, April 11
by Robin Allen
It may still be a case of talk today and jam tomorrow, but many analysts of Saudi Arabia's stock market scene detect some official signals that might indicate a self-sustaining private sector is finally on the way. And some foreign investors are already lining up to be present at the creation.
Last year provided some early evidence that, for the first time since share trading started, the chain that seemed to hold stock prices captive to the rise and fall of oil prices might be fraying.
The previous year had followed the historical pattern. At the end of 1998, the stock market index, caught in the undertow of plunging oil prices and stringent government spending cuts, had dropped almost 30 per cent over 12 months.
To a casual eye, last year's stock market performance might have mirrored the same phenomenon, in reverse.
Following the March 1999 Opec agreement to cut production quotas, oil prices and government revenues doubled and tripled throughout the year. So at first sight it would come as no surprise that by December the National Centre for Financial and Economic Information (NCFEI) index had risen 44 per cent, the second-best yearly historical gain.
The bland figures, however, are misleading. Saudi share prices barely responded to the March Opec agreement. By the end of June, the NCFEI index showed a rise of less than 3 per cent. Even the 11 per cent rise in July and August did not make up for losses of the previous year.
It was only in October, following the pledge by Prince Abdullah Bin Abdul-Aziz, crown prince and first deputy prime minister, to amend investment laws to allow foreign ownership of property and to cut the high tax rates on foreign companies, that the market responded seriously with a rise of nearly 20 per cent in two months.
At about the same time, ministers were announcing measures that, if fully implemented will, analysts agree, lead to widespread interest in the Saudi share market.
The first of these, announced by Ibrahim al-Assaf, finance minister, is to allow non-Saudis to invest in local shares through established mutual funds. Local banks already manage 11 funds for Saudi investors, while Saudi American Bank has appointed an adviser for the proposed opening of its London-traded, closed-end Dollars 250m fund.
Mr al-Assaf is known to be a strong proponent of mutual funds as an investment vehicle. However, many analysts are concerned about a conflict of interest when retail banks push their own funds on depositors, who might prefer to switch to a better-performing fund managed by a rival bank. For this reason alone, many analysts suggest a mandatory separation of commercial and investment banking.
Plans have also been mooted to make global depository receipts available to non-Saudis in telecommunications, utilities, and possibly even Saudi Basic Industries Corporation, the giant petrochemicals company.
Second, according to Mr al-Assaf, a new market regulatory body is planned "to ensure transparency" - an element that is fundamental, according to Saudi and Gulf bankers, to investor confidence.
Without it, the Saudi market will be open to the kind of insider trading that has crippled the confidence of small investors in the neighbouring cash-rich UAE market, where share prices, in a phrase beloved by the local press, have been "heading south" all year, putting in the second-poorest 1999 performance of 12 Arab markets, with only Lebanon performing worse.
Saudi share-trading is conducted by banks through an electronic system, regulated by the Saudi Arabian Monetary Authority (Sama), with the finance and commerce ministries. But a new regulatory body, analysts say, should also include representatives from private-sector banks and businesses.
"The Saudi market will not grow until provisions exist for an independent stock exchange and supervisory body, and until the government eases up on listing requirements," says Beshr Bakheet, managing partner of Bakheet Financial Advisors.
A third measure, outlined in November by Hashem Yamani, the industry and electricity minister, is for plans to allow non-Saudis to own up to 75 per cent of the equity in Saudi companies and still be eligible for soft loans and 10-year tax holidays.
These measures are not before time, analysts say. Total market capitalisation was only Dollars 61bn at the end of last year, a paltry sum compared with over Dollars 600bn of high net worth individual money invested abroad.
The government's domestic debt alone amounts to twice the total market capitalisation of Saudi companies.
The imbalance among quoted companies is equally striking. Nine Saudi banks alone make up for almost half of total capitalisation, ; while the "private sector" identity of some 40 per cent of quoted companies which are either state-owned or state-controlled, exists only in bureaucratic fantasy.
One of the most important shortcomings of the Saudi stock market is its inability to provide long-term finance, says Mr al-Assaf. International Monetary Fund statistics confirm his prognosis.
Accumulated capital inflows during the 15-year period from 1984 to 1997 amounted to a mere Dollars 4bn, compared with almost Dollars 40bn for Malaysia and more than Dollars 50bn into Singapore. In 1996 and 1997, Saudi Arabia experienced net capital outflows. Of the Dollars 3.5bn that came in, only 20 per cent went into the private sector.
"Foreign investors will not determine the direction of the market, but their presence will act as a catalyst," suggests Mr Bakheet. "The moment Saudis see an outsider, with no special allegiance to the country, investing in Saudi Arabia, then Saudis will wonder why they are not doing the same thing. And at that point, maybe some of the Saudi money abroad will come back."
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Foreign investors get same rights as Saudis - Financial Times, April 11
Saudi Arabia's council of ministers (cabinet) yesterday approved a landmark foreign investment law which gives foreign investors "the same privileges, incentives and rights as nationals," according to one prominent lawyer.
The law, which was due to be published late yesterday, reflects a fundamental shift in official Saudi attitudes to foreign investors.
"Whereas before a foreign investment was prohibited unless specifically sanctioned, now it is specifically authorised by a General Investment Authority which is empowered to implement policies designed to encourage foreign investors," the lawyer said.
Analysts agree that cabinet ratification of the new law will enhance Saudi Arabia's application to join the World Trade Organisation.
The law will come into force 30 days after publication in the official gazette.
The law was approved last month by the Shura council, the kingdom's consultative body. Earlier this year, Saudi Arabia's Supreme Economic Council approved draft laws on foreign investment and the creation of the General Investment Authority to provide the mechanism to attract foreign investment.
Economists said the existing regulations, including the requirement that all foreigners have a Saudi sponsor, restrictions on foreign property ownership and limited tax holidays, obstruct the flow of foreign investment.
Executives from 10 international oil companies are expected in Saudi Arabia between April 15 and April 30 for talks on investment in the kingdom's energy industry, according to a report in the Middle East Economic Survey. |
