Interview: Khalid Al Hussan
How will the Saudi Aramco initial public offering (IPO) affect the Saudi Stock Exchange (Tadawul)?
KHALID AL HUSSAN: The Saudi Aramco IPO is clearly a boost to Tadawul, as well as to the Saudi capital market as a whole. The listing will provide a model for other state-owned entities and will propel the Saudi Arabian capital market into the league of top exchanges globally in terms of market capitalisation. It will be the largest IPO ever conducted and will become the largest company listed on Tadawul.
That being said, there are things we need to pay attention to. For example, in terms of capacity, our trading system has recently been upgraded with the most up-to-date technology, and our post-trade systems are undergoing a similar upgrade. Tadawul should not be summarised as the “Aramco Exchange”: we need to promote the diversity of the various sectors on the exchange through an internationally recognised classification, one of which we are currently investigating. Indices should be adapted so that they continue to represent overall market trends and not just Saudi Aramco, such as by capping the weight of Saudi Aramco. An issuance of this size will definitely attract foreign investors, and we need to institute robust post-trade infrastructure that complies with G20 requirements and most of the MSCI emerging market classification criteria.
How will plans to create a “second market” targeting small and medium-sized enterprises within the exchange change things if effectuated?
AL HUSSAN: This “second market” is intended to provide access to capital for companies with growth potential. They will have lower listing requirements, so as not to put too great a burden on them. These markets tend to be more volatile and riskier, so investors should use the right channels when investing in them. The value proposition lies in this market’s ability to provide companies an alternative funding mechanism to bank loans, which are sometimes costly or difficult to access for smaller companies. It should be viewed as an opportunity to diversify the funding sources of these firms, as well as a healthy way for them to become accustomed to the requirements and discipline of the main market in terms of disclosing information to shareholders and investors. The success of such a platform can only be measured over a long period of time, and by the number of companies and amount of capital raised, rather than by the volumes traded.
Are more firms going to be financing themselves through government debt issuances?
AL HUSSAN: It is true that government debt issuance is necessary to create a yield curve, which in turn helps in valuing different debt instruments; however, for the development of corporate debt, much more is required. Debt instruments tend to be used mainly by institutional investors rather than by retail, so defining an appropriate issuance process consistent with such investors’ level of expertise and knowledge will allow corporates to issue bonds in a standardised way, with more certainty in terms of timing and probably fewer disclosure requirements. Equally, a practical regulatory and technical framework should be defined, agreed upon by market participants and approved by the Capital Market Authority for the trading, clearing and settlement of public and corporate debt with the right level of pre-and post-trade transparency.
Having these elements in place would definitely lead to higher levels of investor confidence in the debt market, and would consequently give issuers the ability to source funding at cheaper costs. Furthermore, it would provide corporates with a good way of balancing their different sources of funding. Therefore, I expect more corporates to finance themselves through debt issuances in the near term.
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