Emerging and frontier market fund managers have been waiting
on news from Saudi Arabia’s Capital Markets Authority (CMA), although not
necessarily the replacement
of the chairman of the CMA, Abdulrahman Al- Tuweijri, with Mohammed bin
Abdulmalik Al-Sheikh. Saudi Arabia is
the largest economy and market (152 companies listed and a value of around $350
billion) within the six GCC countries, but has been closed to foreign
investors, except for citizens of the remaining five GCC countries, a system of
swaps where foreign investors are able to get exposure to the Saudi markets.
There have long been rumblings that the Saudi CMA will open
the market up to foreign investors, most recently in July 2012 when the details
of a draft law were released suggesting that investors would be limited to
institutions managing more than $5 billion, with limitations on the sectors in
which they can invest. The former head
of the CMA Al-Tuweijri said that the opening of the market would be “gradual”,
which is likely to continue to be the speed of reforms under his successor.
The value of opening up the largest GCC market to foreign
institutional investors is understandable: foreign equity investors focused on
the MENA region generally have little exposure to one of the largest markets in
the region. Providing them with an
opportunity to get exposure to the Saudi equity market makes sense, and can
help the local stock market deepen further with a larger pool of potential
investors.
However, for Islamic finance, there is a much larger reason
for optimism that foreign investors will be allowed to invest directly in Saudi
Arabia: sukuk. While some Saudi
companies’ sukuk are listed globally (the global sukuk, which are mostly listed
on the London Stock Exchange) there are several local currency sukuk—which are
lightly traded—listed on the Saudi stock exchange (Tadawul) including the
recent $4 billion General Authority of Civil Aviation (GACA) sukuk.
The light trading is a concern, but the introduction of
greater liquidity in the market from foreign institutional investors could
provide a spark to the liquidity. It
would be helpful if the liquidity could start with the GACA sukuk, although
coaxing it out of the inventory of the many financial institutions which hold
it may be challenging since it is repo-eligible and carries a zero risk
weighting (since it is guaranteed by the Saudi government).
The anticipation for the opening of the Saudi capital
markets has been growing for years now, with most of the focus on the equity
markets. However, for Islamic finance,
there are several sukuk listed on Tadawul that could attract investor interest
if the market was open to foreign (non-GCC nationals) institutional
investors. It remains to-be-determined
whether the replacement of the CMA chairman will hasten the change, or whether
it will be a source of further delay.
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