One year later, foreign investors remain cautious on Tadawul

A year after Saudi Arabia opened up its stock market to foreign investors, demand remains subdued as foreign traders and financial institutions watch from the sidelines and wait for reforms to come into effect.

The Saudi government talked up the entry of foreign investors to Tadawul on June 15, 2015 as a key turning point for the market that would result in a major boost to inflows. Since then, however, foreign ownership has remained at low levels amid volatility and an oil slump, currently accounting for only 4.29 percent of Saudi market capitalization.

“I would agree that there were higher expectations on money flow, but we have to understand that international investors represent smart money,” Yazan Abdeen, Head of MENA Liquid Assets at Jeddah-based investment firm SEDCO Capital told Argaam. “Tadawul still has to settle the settlement cycle and ease some restrictions.”

Analysts currently see planned market reforms and Tadawul’s potential inclusion in the MSCI Emerging Market Index within the next few years as the two catalysts for attracting foreign investment.

Muhammad Faisal Potrik, head of research at Riyad Capital says an MSCI inclusion would not only raise the profile of Tadawul, but also “prompt many funds indexed to the MSCI emerging market index to invest in the Saudi market.”

The upcoming initial public offering (IPO) of state-oil giant Saudi Aramco is also expected to drive up interest and trigger momentum. Sebastien Henin, head of asset management at Abu Dhabi-based The National Investor said he expects the offering would attract “massive amounts of foreign investment.”

Tadawul’s plans to float a percentage of its shares would also attract a lot of interest, said Elias Aaraj, an analyst at Saxo Bank Trading Desk.

“It will be huge, but in order to succeed it will need a positive environment, that is, risk appetite from investors and high liquidity in the market,” he said.

Under new economic reforms, Saudi Arabia is aiming to boost foreign direct investment (FDI) to SAR 70 billion by 2020. New rules allowing 100 percent foreign ownership of retail and wholesale businesses in the country have also been approved.

A value-added tax (VAT), subsidy cuts, and a possible income tax on expats are also key points of the reform plan. These added costs could potentially work against efforts to attract foreign investment, if the economy doesn't adjust in parallel to needed growth measures according to John Sfakianakis, director of economic research at Riyadh-based Gulf Research Center.

“The increase in costs to businesses will require restructuring and may affect the competitive advantage of doing business in Saudi Arabia,” he said.

 “Some of these measures have to be taken, and in economics there is always a cost and a choice that has to be considered. The key point is for the measures to coincide with the adjustments business will have to make.”

Write to Joumana Saad at joumana.saad@argaamplus.com