Saudi Arabia has the largest and most liquid stock market in the MENA region. With a market capitalisation of about $2.9bn as of July 2023, Saudi Arabia is considered an attractive destination for international investment. The Kingdom is advancing a comprehensive Financial Sector Development Programme (FSDP) to diversify the economy away from reliance on hydrocarbons in line with the long-term socio-economic development plan Vision 2030. The FSDP aims to broaden and deepen the capital markets in order to empower private Saudi companies and drive growth in high-potential sectors, including financial services.
The programme pledges comprehensive government support for regulatory authorities in implementing new measures, expediting reform and facilitating rapid growth of local markets. The authorities aim to strategically elevate the Saudi Exchange to rank among the top-three exchanges in the world.
Financial Centre
Saudi Arabia has rapidly transformed from a relatively inaccessible equities market into a global financial centre. As of 2016 international investors could only participate in local markets via swap agreements and mutual funds, while relying on local brokers and pre-funded trades. By 2017, 50 qualified foreign investors (QFIs) had registered accounts in the Kingdom. Through numerous initiatives led by the Capital Market Authority (CMA), such as the relaxation of QFI requirements, an attractive capital market, a strong initial public offering (IPO) pipeline, and market development across products and infrastructure, investors from as far afield as London and Mumbai can freely trade Saudi equities.
As a result of these changes, the number of QFIs was 3477 as of July 2023. This increase has helped attract new capital, and looking ahead, the CMA will continue to take the lead in implementing innovations and reforms to spur further growth.
Structure & Oversight
The CMA, established in 2004, is the chief regulator of the Saudi Exchange, which is the Kingdom’s sole authorised securities exchange. The authority is a member of the International Organisation of Securities Commissions and represents the Kingdom at international events.
Established in 2021, the Saudi Tadawul Group serves as an umbrella company encompassing various entities, including the exchange; the Securities Clearing Centre Company (Muqassa); the Securities Depository Centre Company (Edaa); and Wamid, the group’s innovation arm. This new holding structure is driving multiple avenues of sustainable growth in terms of infrastructure improvements that widen access to domestic capital markets and enhance their efficiency, in keeping with the CMA’s remit. For example, the regulator revealed in May 2023 that it is exploring a legal framework to allow special purpose acquisition companies (SPACs) to list in the Kingdom, following the increase in capital committed to such vehicles in more developed markets.
Although the Middle East has yet to see a significant rise in SPACs, one such company, supported by Abu Dhabi-based investment firms ADQ and Chimera Investments, has successfully listed. This regional development mirrors the ambition of the Saudi authority to foster the growth of local markets.
Investment in listed equities takes place on both the Saudi Exchange’s Main Market and the Nomu – Parallel Market; the latter was launched in 2017 to provide an alternative platform with lighter listing requirements. The Nomu – Parallel Market is positioned to enable small and medium-sized enterprises (SMEs) to scale and meaningfully contribute to Vision 2030’s diversification targets. Investment is restricted to qualified investors, which must be joint stock companies with a minimum capitalisation of SR10m ($2.7m), compared to SR300m ($80m) on the Saudi Exchange’s Main Market. In addition, the number of public shareholders required is lower – 50 versus 200 – as are financial disclosure requirements, in line with the Nomu – Parallel Market’s goal of boosting the depth and liquidity of the market.
Main Markets
The main board, known as the Tadawul All Share Index (TASI), is complemented by the MSCI Tadawul 30 Index (MT30), which comprises the top-30 securities from the MSCI Saudi Arabia Investable Market Index based on their free float market capitalisation. The main board is also part of the MSCI Emerging Markets and FTSE Russell indices. As of 2020 the MT30 Index Futures contract allows market participants to trade derivatives linked to the MT30. Additionally, the TASI Islamic Index, launched in 2022, enables investors to monitor sharia-compliant companies’ performance. The Nomu – Parallel Market trading centres around the Parallel Market Capped Index (NomuC).
The CMA collaborates closely with the Committee for Resolution of Securities Disputes to ensure the markets function smoothly. In 2021 the CMA issued 106 penalty decisions against 357 suspected offenders, comprising senior executives, investors, capital market institutions and listed companies. The vast majority of related fines were issued for breach of specific market behaviour regulations.
In 2018 the Saudi Exchange underwent significant reforms to its debt markets, with the listing of government debt instruments, followed by initiating several debt indices including a partnership with iBoxx. Since then, QFI restrictions on debt instruments were removed, a REPO market was activated, and links with EuroClear and Clearstream were established with Edaa.
Regulatory Developments
As the Kingdom continues to recover its growth momentum following the Covid-19 pandemic, the CMA is stepping up the implementation of reforms and innovations designed to boost the capital markets. In a significant move, the body approved new rules in May 2023 to grant easier access for overseas investors. The rules enable institutions to provide discretionary portfolio-management services to foreigners, simplifying procedures and reducing the disparity between QFIs and other investment vehicles. As of July 2023 QFIs are no longer required to undergo a separate qualification process and instead only need to fulfil the criteria for opening an investment account. Additionally, the CMA has paved the way for QFIs to invest in securities through swap agreements without the need to notify the regulatory authority. The move is helping to promote a conducive investment environment.
Foreigners now benefit from relaxed restrictions that enable them to utilise online money-transfer services to move funds between their accounts and the Saudi securities market. Such actions have had a marked impact on foreign investor inflows in the past: the CMA’s previous gradual easing of rules in 2018 led to a 714% increase in the number of QFIs from 2018 to July 2023. This move also resulted in a rise in foreign investors’ ownership ratio of the free float market, increasing from 3.8% to 13.05%. By the fourth quarter of 2022, QFIs accounted for a fifth of the total market trading volume, signifying the Kingdom’s growing appeal as an international portfolio investment destination.
In December 2022 the exchange took a step towards expanding its appeal by accepting the first dual-listed stock. Americana Restaurants International made its debut on both the Saudi Exchange and Abu Dhabi Securities Exchange. The Saudi Exchange and Edaa have partnered with the Muscat Stock Exchange and the Muscat Clearing and Depository Company to allow cross listings between Saudi Arabia and Oman. Looking ahead, the CMA has said that it is planning to introduce a broader framework governing global dual listings, though no timeline had yet been set as of mid-2023.
Collaboration
GCC bourses are accelerating regional integration in a bid to deepen the pool of capital available to develop local companies, and cooperatively develop best practices in emerging fields. For example, the Saudi Exchange partnered with its Kuwaiti counterpart in December 2022 to explore collaboration opportunities in financial technology (fintech) products, sustainability, and environmental, social and governance (ESG) reporting and standards.
Meanwhile, the Saudi Exchange continues to update its market rules to boost liquidity and enhance the efficiency of price determination. In December 2022 it outlined a market-making framework requiring exchange members, derivatives exchange members or their clients to maintain liquidity for a listed security by providing continuous quotes throughout market trading. Since then, the Saudi Exchange has onboarded several market makers on its Equity market and has an active market maker on index futures.
In another important development, trading on single stock futures (SSFs) went live in July 2022, marking the launch of an initial tranche of companies including Al Rajhi Bank, Aramco, Saudi National Bank, Alinma Bank, SABIC, stc, Saudi Kayan Petrochemical, Saudi Electricity Company, Almarai and Ma’aden.
SSFs allow traders to hedge their stock portfolios and investors to short sell without owning the underlying stock by giving them the right to buy or sell a stock at a fixed price on a future date. A key benefit is that investors can develop a strategy focusing on the shares of a single company instead of a group of shares, as is the case with index futures. Moreover, the advantage of lower margin requirements associated with SSFs allows investors with limited capital to actively participate in trading activities. Despite the introduction of multiple SSF contracts, it is evident that investors have yet to fully exploit the potential benefits these instruments can offer to their investment endeavours.
Regulators are set to continue widening the channels through which investors can funnel capital into the Kingdom’s capital markets, having approved an equity crowdfunding framework in September 2022. The Saudi Central Bank (SAMA) and the CMA promptly approved a licence for sharia crowdfunding company Manafa, helping the Saudi platform, which provides debt and equity financing to SMEs across a variety of sectors – secure $28m in Series A funding.
CMA officials have hailed the contribution of fintech firms in accelerating the development of local capital markets; by March 2023 there were approximately 150 companies operating in the segment, worth a combined SR4bn ($1.1bn), according to the CMA.
Performance
As of December 2022 the TASI comprised 223 listed companies, with the largest proportion in the materials sector (22.7%) – encompassing chemicals, construction materials and metals – followed by banks (12.1%) and energy (6.5%). Despite a robust IPO pipeline (see regional analysis), the main board witnessed a decline in 2022, concluding the year with a 7.1% decrease at 10,478.5 points, marking its first annual loss in seven years.
The start of Russia’s invasion of Ukraine in early 2022, high global interest rates and rising inflation had an adverse effect on valuations. The Saudi riyal, along with several other Gulf currencies, is pegged to the US dollar, and SAMA has therefore largely mirrored the US Federal Reserve’s monetary tightening path. This has had a limited but tangible impact on non-oil economic activity and credit growth, putting pressure on some stock valuations and causing them to decline from their peak levels observed in 2021.
In 2022 the total number of transactions conducted in the market experienced a decline of 4.3%, reaching 87.9m transactions. Similarly, the volume of shares traded during the year saw a significant decrease of 34.2%, with 45.1bn shares traded. The value of shares traded over the year dropped by 23.6% to SR1.7trn ($453.3bn), with banks just behind materials in terms of sector performance, accounting for 21.8% in value terms. Materials emerged as the most active shares traded, accounting for 19.8% by volume and 23.8% by value of market trades. Banks were the second most active in terms of volume, followed by real estate management and development stocks.
As of end-2022 property development company Dar Al Arkan led the market in terms of volume traded, with 3.7bn shares, followed by Aramco and Alinma Bank, which both recorded 1.9bn shares traded by volume. Al Rajhi Bank was the most active stock in terms of value, followed by Aramco. Outsourcing firm Elm was the best-performing stock, up 159% in value over the year after debuting in mid-February 2022, while United Cooperative Assurance experienced the most significant decline, down 79%.
Listings
Even though some GCC secondary boards have struggled to gain traction, the Nomu – Parallel Market is emerging as a vibrant and rapidly growing alternative market, attracting 32 listings in 2022, compared with 11 the previous year, helping lift its total traded value in 2022 by 18.6% to SR13.5bn ($3.6bn).
In 2022 the Main Market saw a total of 19 listings, attracting a substantial influx of new investor capital, amounting to SR37.5bn ($10bn). By the end of the year these newly listed companies had seen their combined market capitalisation increase to SR147.4bn ($39.3bn), representing around 1.5% of total market capitalisation.
Moreover, from the beginning of 2023 until the end of July 2023, the CMA has approved 30 listing applications while the pipeline shows a high influx of interest from potential issuers. The largest listing by share capital, Marafiq raised SR3.4bn ($906.4m), with the retail allocation 632% oversubscribed. Investors had strong interest in the offering led by the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, demonstrating confidence in its utilities sector and Vision 2030’s plans to open government-owned firms to wider public ownership.
Other top-tier deals that showcase the Saudi Exchange’s ability to host large-scale offerings included the $1.3bn IPO from Aramco’s Base Oils, which was almost 30 times oversubscribed. The IPO line-up featured companies from diverse sectors, in line with Vision 2030 goals. Companies such as East Pipes Integrated in materials, Scientific and Medical Equipment House in health care, Perfect Presentation for Commercial Services in software and services, and Americana Restaurants International in consumer services were part of this array.
Notably, Albilad Capital launched its MSCI US Equity Exchange Traded Fund (ETF), paving the way for a follow-up in January 2023, the Albilad MSCI US Tech ETF. The successful launch of the latter took the number of ETFs traded on the exchange to eight, allowing investors to track the performance of other markets and their constituents without paying the related fees or receiving the associated dividends.
ETFs are gaining momentum, as demonstrated by Albilad Capital’s recent signing of a memorandum of understanding with KraneShares in April 2023, with KraneShares to launch more products targeting emerging markets and China. The tie-up also aims to facilitate trading of carbon and climate-related assets, in what would be a first for the Saudi market.
Fundraising
MENA is rapidly emerging as a prime destination for mergers and acquisitions (M&A). Bankers and legal teams, as well as Gulf governments, continue to reform and spin off or consolidate previously government-owned businesses, as local sovereign wealth funds deploy their substantial capital.
Deal activity in the region rose by 13% in 2022 to 754 deals worth $82.5bn, reflecting a positive business environment and the continued easing of pandemic travel restrictions. Saudi Arabia trailed the UAE in terms of both target and bidder activity, hosting 106 deals versus 220 in the UAE, according to PwC. Standout acquisitions included the PIF’s non-binding offer to buy a 51% stake in Tawal, the telecom towers unit of stc valued at $5.8bn.
In 2022 the PIF made significant acquisitions, including a 17% stake in Saudi Arabia’s Kingdom Holding for $1.5bn; a 34% stake in Egypt’s B.Tech consumer electronics company, via its Egyptian affiliate, for $150m; and a 30% stake in district cooling provider Saudi Tabreed, a unit of UAE-listed National Central Cooling, for $250m. These transactions highlight the PIF’s influence in driving local and regional investment activity and underscore the fund’s commitment to expanding its portfolio and fostering growth in various sectors.
In March 2023 Aramco completed its acquisition of US-based Valvoline’s global products business for $2.7bn, strategically enhancing its global base oils production and research and development capabilities, to consolidate its market position. In terms of fundraising, in addition to the mentioned Manafa action, buy-now/ pay-later fintech firm Tamara successfully raised $100m in a Series B funding round, in which Sanabil was the lead investor. Meanwhile, NEOM, the $500bn Saudi mega-city project, has initiated a domestic tour to raise funds for its construction.
Looking ahead, PwC’s “TransAct Middle East 2023” report designated the Gulf a global “sweet spot” for M&A activity, as regional economies pursue aggressive infrastructure rollouts coupled with deep investment in technology, in addition to the opportunities being created by the ongoing energy transition. Vision 2030’s focus on growing the hospitality and tourism sectors should also contribute to future M&A activity.
Investment funds are closely tracking lucrative opportunities, as evidenced by the data released by the CMA in December 2022 indicating a substantial increase in the number of public and private funds to 961. This figure marks a 25% increase compared to the corresponding period in 2021. Most were concentrated in the real estate sector.
Debt
In October 2022 Saudi Arabia made a return to sovereign debt markets after nearly a year of absence. The country sold Islamic and conventional bonds worth $5bn, split 50:50 in terms of value and carrying six- and 10-year terms, respectively. Demand for the bond sale exceeded $26.5bn, indicating robust investor interest during a period when few emerging economies had tapped the market, and Gulf issuance had declined by 60% year-on-year. During the same month the PIF made its debut in the debt market, selling $3bn of green bonds with maturities of five and 10 years. This issuance marked a milestone for the investment fund. The PIF stated that the proceeds from these bonds would be utilised to finance or refinance investment in various environmentally beneficial projects.
Green Initiatives
The sale attracted offers worth about $25bn, and was topped by a $500m tranche of 100-year notes, the first of that tenor in the region, demonstrating investor confidence in both the Kingdom’s ability to meet its 2060 netzero commitment, and the fund’s long-term financial sustainability. Given this initial success, analysts expect the PIF to return to the green bond market to tap surging global demand for ESG-linked financing, although the fund retains holdings in various hydrocarbons ventures.
In a related initiative, the authorities established a new $133m Regional Voluntary Carbon Market Company to help regional businesses lower their emissions. The company will also pioneer the development of a GCC carbon asset market. The PIF is leading the creation of the voluntary carbon market, in partnership with the Saudi Tadawul Group. This effort aims to enable emissions reductions across value chains by facilitating the trading of carbon credits among participants.
Saudi Arabia commands strong debt ratings from agencies, with Fitch Ratings in April 2023 upgrading its long-term foreign currency issuer default rating from “A” to “A+”, with a stable outlook, reflecting strong fiscal and external balance sheets. In March 2023 Moody’s offered a similarly robust assessment, affirming its “A1” rating and upgrading its outlook from stable to positive. Both agencies took into account not only the likely trajectory of the global oil price, but also the ongoing success of the National Debt Management Centre (NDMC), established in 2015, in reducing the proportion of national debt. The Saudi public debtto-GDP ratio is expected to fall from 32.5% in 2019 to 25.4% in 2024, according to a Ministry of Finance report (see Economy chapter).
The government remains the dominant entity in the domestic debt market, having listed 70 sukuk (Islamic bonds) and bonds on the Government Debt Instruments Index, versus four in the corporate equivalent, accounting for 97.7% of a market worth a total traded value of SR4.4bn ($1.2bn) as of the fourth quarter of 2022. In 2022 the Sukuk and Bonds Market Index fell by 7.4% to 929.72 points; nine new products were listed, while 14 were delisted, leaving a total of 74 at year end.
A key aspect that the Kingdom is working to improve is the depth and activity of its secondary debt and equity markets. To this end, in May 2023 the CMA announced that it would cancel its commissions on sukuk and bond trading. The move will reduce the cost of such trades, increase market competitiveness and widen the pool of participating domestic investors.
In 2022 the Ministry of Finance and the NDMC expanded their primary dealer network for local government debt instruments by incorporating five new international banks. This move doubled the available bank channels from the existing five domestic banks, offering investors more options to subscribe to local government debt instruments.
Between January 2018 and the end of the first half of 2022 the CMA approved 116 requests to raise the capital of listed companies, resulting in an increase of over SR100bn ($26.7m). The capital increases were achieved through a variety of methods, with new capital contributing 60%, rights issues comprising 37.1%, and debt conversions accounting for 2.6%.
Outlook
The Saudi Exchange is experiencing a vibrant IPO pipeline, indicating strong interest among companies to go public and raise capital from the market. Saudi Arabia is expected to take the lead in M&A activity in the region, further reinforcing the attractiveness of its capital markets.
While there has been notable progress in the Saudi capital market, there are still areas that require attention to sustain the momentum. Notably, trading activity in secondary markets, especially in the debt segment, remains subdued. Additionally, certain innovative equity trading options, such as SSFs, have yet to see widespread adoption. However, there are positive signs on the horizon. The macroeconomic environment is expected to remain stable, with a GDP growth rate of around 3.1% projected for 2023, primarily driven by the non-oil sector and strong consumer spending.
Furthermore, due to a lack of high-yield global investment options, the Saudi Exchange is expected to maintain its position as the premier stock exchange in the region. As economic diversification efforts continue, the exchange is likely to become one of the five most valuable markets in the world in the coming years.
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