The News
Saudi Arabia is preparing to lift restrictions on foreign investors buying local stocks, in the latest step by regulators to boost trading on the Tadawul exchange.
The Capital Market Authority (CMA) launched a 30-day consultation on rules that, if approved, would scrap the so-called Qualified Foreign Investor (QFI) program, which forces international investors to meet certain criteria before they can trade. The proposal would also eliminate a swap program used by foreigners to access the market indirectly.
The CMA said the move was part of a “gradual approach to opening the market” designed to attract “greater flows of foreign capital.” It hinted that further measures would follow to increase international participation.
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Matthew’s view
Following on from moves announced last week, removing the QFI program signals that Saudi Arabia is getting serious about taking steps to attract foreign cash, even if the latest announcement sparked some confusion.
The QFI program was introduced a decade ago as the kingdom’s first step to open its exchange to global money, initially requiring participants to have at least $5 billion of assets under management. At the time, regulators worried about an influx of “hot money” entering and exiting quickly. No longer.
Criteria have been eased several times since then as the kingdom increasingly sees the need to court foreign capital. Saudi Arabia has a big pipeline of companies planning to list on the stock market, many with government ownership.
To digest all this new supply of shares the market will need to attract as many investors as possible. That should also help boost liquidity. Low volumes of trading has been a common bugbear for foreign investors looking at investing in Tadawul.
There are now around 4,500 registered QFIs on the Saudi exchange, including some of the world’s biggest fund managers: including BlackRock, Franklin Templeton and JPMorgan Asset Management. Once the latest amendments to the rules are finalized anyone around the world will be able to quickly start investing in the Saudi market.
Some investors were confused that the draft rules published Wednesday evening still contained references to a foreign ownership cap that was set to be amended. Dumping the QFI regime is the start. Next would be changes to foreign ownership limits, which are currently capped at 49%, two people familiar with the plans said. The CMA is reportedly working on a proposal to adjust that cap, though currently foreigners hold only about 11% of the market and no single stock is anywhere near the limit.
Market reaction to the QFI consultation was muted, in contrast to the buying spree triggered by potential lifting of foreign ownership limits. But that was probably overdone. Saudi companies will still need to demonstrate strong earnings growth amid a public sector showing signs of slower spending if they are to truly attract more foreign capital.