Saudi Arabia Opens Stock Market To Foreign Investment Amid Low Oil Prices, Yemen War

Tyler Durden's picture

Saudi Arabia officially opened its stock market to foreign investment on Monday, in what’s being billed as a potential game changer for emerging markets investors. The country’s Capital Markets Authority finalized the rules for direct foreign investment in early May, although plans had been in the works for quite some time. Summarizing, qualified foreign investors (QFIs) are defined as institutions with at least $5 billion in AUM and five years of experience, no QFI can hold more than 5% of a single issue and no consortium of QFIs can hold 20% or more in a single stock. 

Saudi Arabia hopes the liberalization of its stock market will pave the way for MSCI EM benchmark inclusion, a process which in all likelihood will take at least two years. Here’s a look at how the Saudi market stacks up in terms of both daily trading volumes and relative size...

...and here’s a bit on valuation and sector weights…

To be sure, the move to allow direct foreign ownership of domestic equities couldn’t come at better time. Falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position and the country is quickly drawing down its petrodollar reserves.

Citi has more on the economic situation facing Riyadh: 

King Salman has clearly signaled the priorities for his administration since succeeding from King Abdullah in January. All indications have been that the Kingdom will stay the course on oil policy, protecting market share and not intervening to support global oil prices. For Saudi, this means having to deal with the consequences of significantly lower oil prices — Citi’s forecast is for Brent to average US$54 per barrel in 2015. At this price, we expect total Saudi government revenues to fall by some 41% in 2015. We believe that as a result it is highly likely that Saudi will cut expenditure sharply next year. According to our calculations, if Saudi Arabia were to maintain the same level of spending this year as it did last year, the budget deficit would balloon to US$130bn, or 22% of GDP. This would be unsustainable, in our view, with fiscal reserves covering just three years of such levels of expenditure. It would also be three times the level of deficit the government has budgeted for. We therefore think it is likely that total expenditure will shrink by around 20%, bringing the overall deficit to 13% of GDP.

And here's more color from Tim Fox, head of research and chief economist at Emirates NBD:

The sharp decline in oil prices since last summer has had an immediate and significant impact on the country’s fiscal position. Last year’s budget included the first deficit in 12 years at 65.5 billion Saudi riyals (minus 2.3 per cent of the GDP), and the deficit is likely to have widened this year to about 12 per cent. In addition to further weakness in oil prices in the first quarter of this year, government spending has likely been higher than budgeted year-to-date as a result of one-off bonuses and disbursements on the accession of King Salman in February and the escalation of military activity in Yemen and against ISIL.

 

Given the increased spending on defence and the difficulty in reducing public-sector wages, Saudi Arabia is likely to cut its capital spending budget..

 

The decision to open the Saudi equity market to direct foreign investment looks timely. Saudi Arabia has run a current-account surplus ... mainly because of oil revenue. The current-account surplus narrowed ... last year ... both because of lower oil revenue and a higher deficit on the services balance, and looks like it will fall into deficit this year. An increase in portfolio investment after the opening of the equity market, while by no means necessary, would help to offset the decline in the current account, which in the absence of other inward investment would have put additional pressure on official foreign exchange reserves and reduced manoeuvrability on the balance sheet.

 


In principle, Saudi Arabia should be able to offset pressure on its current account via inflows to its capital account. This is a nice option to have when you're fighting an expensive proxy war on your Southern border and when you need to keep oil prices low in order to drive high-cost US producers from the market and force a certain Russian autocrat to stop supporting a regional nemisis. 

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Saudi Arabia snapshot via Citi:

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nmewn's picture

Now, before everyone gets in a titter wanting to get in on the ground floor of Beheading Inc. and Sharia Drivers Licenses for Women LLC, just note the Big Money gets first crack at this "market".

You'll have to wait for the ETF and buy from the Big Boys ;-)

TheFourthStooge-ing's picture

Between the Saudis losing control of their wahhabi instability monster and the habit of Vichy DC throwing foreign "partners" under the bus, there is a real risk of investors losing their heads.

Ignatius's picture

Just the same, I'm taking a short position on neck length.

DeadFred's picture

Does anyone know if the Swiss Central Bank has an account yet?

basho's picture

without a doubt. lol

if not then the ubs and cs proxies have accts.

Freddie's picture

Saudi stock market and investment?

I would rather send them an SS-18 Satan akaR-36M2 Voevoda instead of my IRA.

https://www.youtube.com/watch?v=8lw7oKhIu60

The Topol M will do in a pinch. 

https://www.youtube.com/watch?v=t9_-rneUjmQ

Say bye bye to the Zio-House of Zaud part of the ZWO.

Niall Of The Nine Hostages's picture

As with any IPO, it's fair to say that the opening of the Saudi stock market to heathens daft enough to invest there is a sign that this racket's best days are behind it and the insiders (the House of Saud) want to cash out while suckers are still plentiful.

I hear a few firms will still not be open to foreign investment, mostly real estate firms with property in Mecca in their portfolios. Once the oil runs out, fleecing hajjis---ahem, tourism---is the only source of hard cash Saudi Arabia will be able to count on. No wonder the Sauds plan to hold onto that part of their portfolio. It's a hedge against the banksters' fiddling them out of the oil money---which they will, never fear.

Niall Of The Nine Hostages's picture

Also---emerging market? Saudi GDP per capita is comparable to Canada's, and living standards for Saudi subjects and western expats (as opposed to their Pakistani slaves) are well ahead of Canadian ones.

So would yours be if you had gangs of servants waiting on you hand and foot that you only had to pay when you felt like it.

InanimateCarbonRod's picture

You mean, just like China?

nmewn's picture

Cept they import their labor, instead of drilling down on the domestics, why, that could be a kings head-in-a-basket.

Behold the "fake" Saudi worker...

http://blogs.wsj.com/middleeast/2014/02/03/saudi-labour-market-overhaul-comes-at-a-cost/

disabledvet's picture

Behold fake Saudi worker now former worker and Yemenese infantry soldier.

Is there anything left for the former President of Yemen to go back to?

Not a very nice liberation YTD. No wonder Russia abstained.

beaker's picture

Makes perfect sense. Now they have someone to lay their positions to

Ajax_USB_Port_Repair_Service_'s picture

They need bag holders. EVERY COUNTRY now needs bag holders!

Dragon HAwk's picture

Why do i get the feeling this article is just like the old river boats, when the pro gamblers would push out a chair and welcome the suckers.. Come on in always room for one more Player..

Freddie's picture

Maybe they can sell some junk bonds for Crown Prince Fayed aka Shlomo Greenberg's Saudi oil fracking company.    These people are not really Arabs. 

dogismycopilot's picture

Having lived and worked in Saudi Arabia, I can assure you that NO ONE  in the Kingdom understands the concept of "Insider Trading". Has anyone ever been to an Arabic stock exchange? I traded in one and one day went down to the floor....nothing but Sheikh Flip Flops sitting around with their prayer beads talking to each other. Come to find out, they will only buy and sell when they KNOW the trade and that there is no risk.

You think Wall Street is corrupt? Try a market where everyone is someone's cousin who is related to the king or who knows the CEO of this company...and as for losing money? forget about it. The greatest sin for a Saudi is to lose money. Impossible. Do you think they will sacrifice their honor to keep a transaction 'fair'. 

This is worse than Vegas, worse than the US stock market...hell, you would do better to go to Macau because at least there you can have some women and wine while you gamble away your money. The Saudi stock market?

This is an abbatoir for the Kaffir financial pig. Full stop.

 

assistedliving's picture

you mean just like Wall St?  Fleet St?  Only we have the SEC? 

lmao

basho's picture

now that is an idea whose time has come. the sawdy stock market.

securities from a secure mkt. in a secure country. lmao

Wahooo's picture

Anyone investing directly in those devils should be shot.

fremannx's picture

The Saudi's market will fall along with every other market as global deflationary depression engulfs the world. OIL prices will remain in decline for years to come.

 

http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...