Interview: Adel Al Ghamdi
How will opening the exchange to foreign institutional investors affect the capital markets?
ADEL AL GHAMDI: We expect the impact of the Qualified Foreign Investor (QFI) framework to be profound, especially in terms of enhancing shareholder activism, which helps promote better reporting, investor relations and corporate governance practices amongst our issuers. The framework introduces a sophisticated institutional investor base with long-term horizons and investment behaviour that, based on our experience with the swap framework, has been negatively correlated with that of Saudi individual investors, which represent nearly 90% of monthly value traded.
Over time, we expect the growing sophistication of market stakeholders to help foster the development of advanced market frameworks and infrastructure, as well as broader and more mature research coverage of our listed companies. From an economic perspective, this policy shift also represents a significant step towards convergence, as it allows us to better harmonise with the global financial community.
Should the Capital Market Authority (CMA) allow for greater foreigner stakes in listed companies?
AL GHAMDI: The proposed QFI rules were designed specifically to facilitate portfolio investment flows into the Kingdom. This is supported by the 5% ownership ceiling prescribed for each qualifying investor in the draft rules. As a result of this limitation, the rules do not cater to strategic foreign transactions on listed companies. Any future changes to the framework would likely be focused on enhancing the flow of foreign portfolio investments, rather than tackling the barriers to strategic investment.
However, I am optimistic that the CMA will explore the need for a specific policy framework to facilitate strategic investments in Saudi listed companies. This was recognised as an important step to further capital market development during the conceptual phase of the QFI framework. Opening the door to strategic foreign stakes would allow our issuers to tap into technical knowledge, expertise and foreign intellectual capital; enhance their capacity to develop and grow a broader range of products and services; expand their international reach and visibility; develop international trade ties and diversified economic exposure; and encourage higher standards of corporate governance and organisational excellence.
How are oil prices affecting the Saudi market?
AL GHAMDI: From the perspective of the stock market, the Saudi Stock Exchange All Share Index erased 23% of its gains by the end of 2014 in response to the sharp fall in oil prices, though it has since recovered nearly half this decline. The Saudi stock market has actually had close to zero correlation with oil prices in the past five years, but has nonetheless maintained a weak positive correlation with the US dollar, US markets and European markets over the same period. This relationship has not materially changed over the course of 2014.
While the decline in crude oil prices is expected to reduce government revenues in 2015, other factors continue to counteract the impact of this budgeted decline, including the strong appreciation of the dollar. Indeed, every dollar of oil-export revenues earned by the Kingdom is 18% more valuable now from a global purchasing power perspective than when the 44% decline in oil prices began in September 2014.
Furthermore – notwithstanding the availability of a nearly $737bn fiscal cushion – the projected 2015 budget deficit of $39bn could be a strategic opportunity to issue sovereign debt.
Saudi government debt stands at just 2.7% of GDP – one of the lowest levels in the world, compared to 9.4% in Russia, 96% in the US and 103% in the UK. Issuing new government bonds would serve to establish a sovereign yield curve to act as a pricing benchmark, and this would stimulate commercial debt issuances, which is high on the national agenda. It would also help reduce the public and corporate cost of capital in the coming years.
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