Despite low oil price, Saudi Arabia stays course in opening stock markets

Despite low oil price, Saudi Arabia stays course in opening stock markets

Saudi Arabia is set to stay the course in opening up its stock markets to foreign investment despite the change in leadership and fluctuations in the price of oil.

In light of persistently low oil prices, much discussion of politics in Saudi Arabia has inevitably focussed on the price of oil. Indeed, while energy prices jumped briefly in response to former King Abdullah’s passing, most analysts remained confident that, at least in the short term, King Salman was likely to maintain oil production. They were right.

Less attention has been given to the implications of the new Saudi cabinet for the liberalization of the Saudi Stock Exchange, the Tadawul, which, given its size, has the potential to be one of 2015’s headline changes for global investment.

Since last year’s July 2014 announcement, there has been growing interest in how Saudi Arabia will seek to liberalize one of the world’s last and largest restricted markets.

Stock market reactions a sign of things to come

In January, the Riyadh-based Capital Market Authority (CMA), which regulates Saudi’s equity exchange, handed out more than SAR 800,000 (USD 200,000) in fines to listed companies – the most in one month since 2004, and more than the previous three months combined.

Some analysts noted this represents Saudi Arabia’s commitment to press on with liberalization. However, these fines were awarded on 15 January, prior to the change in the Cabinet and the appointment of the new King.

Importantly, Mohammed Al-Jadaan, the newly named head of the Capital Market Authority (CMA) seems to have done little to shift the Saudi stance on exchange reform, having released a statement noting that the CMA has an “institutional commitment” to open the market to foreign investors.

Indeed, under Al-Jadaan, the CMA has continued to issue fines for breach of listing regulations, echoing the recent behaviour of his predecessor. Similarly, the CMA released a press release on 17 February encouraging further transparency, arguably aimed at attracting investors.

In this sense, things are very much on course. However, Al-Jadaan’s press release also noted there would be “no major changes” to Saudi’s stance. This does not prohibit minor changes, however.

In light of Saudi’s firm commitment to current oil production levels changes, particularly with regards to the time frame, seem likely. Changes to Saudi Arabia’s investment policy in part require the oil price to not fall further. When liberalization will occur is not entirely clear.

Stock markets in a number of Gulf countries, including Saudi Arabia, declined sharply at the end of 2014, and policy makers are unlikely to go ahead with reform until company valuations recover lost ground. This does not seem likely in the near term.

While on 16 February Saudi Arabia’s stocks rallied after Brent crude had its biggest two-day advance since 2009, resulting in a 2% rise to 9,442.43, the highest since 24 November, share prices have not recovered all the ground lost towards the end of 2014.

April 2015, the initial deadline for the opening of the Bourse, now seems optimistic.

Regardless of whether oil prices have reached a new all-time low, prices are likely to stay depressed for some time. Stockpiles of oil and rates of production are the highest they have been for 80 years and show no signs of slowing.

It is plausible, although not very probable, that pressure to allow foreign investment may come from listed companies if they need capital, which is likely to come flooding in from foreign investors if they meet Saudi’s investment criteria.

In relation to this, particular attention should be paid to energy-related firms and banks, which have large exposures to the oil sector and will face difficult financing conditions with low oil prices affecting their earnings and creditworthiness.

Al-Jadaan’s recent actions suggest that the liberalization of the Saudi Market is as committed as ever to opening up to foreign investment, though it is perhaps unlikely to open by the end of the first half of 2014. Watch for increasing numbers of IPO’s, a continued strict issuance of fines, and more importantly, the extent to which the oil price dents company valuations.

About Author

Rebecca Cockayne

Rebecca is an international development professional working on projects across Africa and Asia. She holds a Masters in Global Politics from LSE and previously worked in global banking. All views are her own.