Saudi Sukuk Markets potentially opening

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.