Saudi Arabia has made substantial progress in attracting foreign investors to its capital markets in recent years, transforming the Kingdom into a key destination for global capital. Through a series of strategic reforms – including the easing of foreign ownership restrictions, the inclusion of Saudi stocks in major global indices and enhanced regulatory frameworks – the Kingdom has opened its market to a broader international audience. These efforts have increased foreign investment inflows significantly, contributing to greater market liquidity and diversification, and positioning Saudi Arabia as a vital player in the global financial landscape.
By The Numbers
From 2018 through to the end of the second quarter of 2024 the overall holdings of foreign investors on the Saudi Exchange, known as the Tadawul, increased four-fold, reaching SR320bn ($85bn) – representing around 3.1% of the total market value. In that quarter foreign investors accounted for 27% of the traded value on the Tadawul, which was equal to SR241bn ($64.3bn). This figure has risen significantly in recent years, up from SR103bn ($27.5bn) in the first quarter of 2023. In general, non-Saudis constitute 4.7% of investors on the Tadawul, as compared to around 2% in the Nomu – Parallel Market.
Foreign holdings on both markets at the end of the second quarter of 2024 were down slightly on the previous quarter, but up on longer timeframes. For instance, as of the end of June 2024 the value of foreign holdings on the Tadawul was SR402.4bn ($107.3bn), down around 4% on three months prior, but up more than 7% year-on-year (y-o-y), according to data from the Capital Market Authority (CMA). Similarly, foreign holdings on the Nomu – Parallel Market were down 0.6% in the second quarter of 2024, but up 46.3% y-o-y.
Regulatory Advances
The most recent growth in foreign participation in Saudi equity markets can be traced, in large part, back to the CMA, which issued a raft of new rules for foreign investors in securities in the Kingdom’s capital markets in May 2023. The new regulatory package consisted of a single overriding set of rules that effectively consolidated a series of extant frameworks put in place to govern foreign investors over the past two decades. Major changes in the 2023 statute included a major widening of the definition of a qualified foreign investor (QFI). While in most cases a QFI is still required to have SR1.8bn ($480m) in assets under management, exceptions to this requirement include pension funds; endowments for scientific, educational and cultural institutions; public institutions; and international institutions of which the Kingdom is a member, among others. Other changes included the cancellation of a formal assessment process for QFIs and the addition of a new channel for foreign investment, namely discretionary portfolios managed by registered capital market institutions.
These rule changes are only the most recent efforts by the CMA and the market to not only attract foreign investors – who are widely considered to be a key source of investor diversity – but also to strengthen and professionalise the Kingdom’s capital markets. A major milestone took place in August 2019, when the Tadawul joined the MSCI Emerging Markets Index. Prior to the 2023 regulations, which pertained to securities, the CMA had already allowed foreign investors to buy directly into debt listings in the Kingdom.
Challenges
Despite recent and ongoing reforms, regulatory complexity and bureaucratic hurdles remain concerns for some international investors, who may find navigating the local legal and financial systems challenging. Similarly, corporate governance standards, although improving, still require further alignment with global best practices to build investor confidence. Lastly, liquidity constraints in some sectors and the relatively small size of certain market segments can limit investment opportunities, making it crucial for Saudi Arabia to continue the significant strides already made in enhancing its market infrastructure to sustain and grow both foreign investment and market activity.
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