Driving through reforms: Saudi gets behind the wheel

One of the most closed and conservative societies in the world, Saudi is gradually opening its doors to both foreign investment and international ideals. In an exclusive interview with GlobalMarkets, Mohammed Abdullah El-Kuwaiz, chairman of Saudi’s Capital Market Authority, discusses the game-changing implications of emerging market status on the country’s equity markets and the planned IPO of prize asset Aramco

  • By Virginia Furness
  • 11 Oct 2017
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Mohammed El-Kuwaiz

At the end of September, King Salman of Saudi Arabia granted women the right to drive. To the outside world it no doubt seems absurd that there was a ban on women driving in the first place. Nevertheless, the move was rightly celebrated, not just as a victory for equality but also because it was seen as evidence that Saudi’s ruling family was still serious about pushing through its much anticipated and ambitious reform agenda, called Vision 2030, drawn up by the king’s son Crown Prince Mohammad Bin Salman Al Saud.


There were fears that Saudi’s very public spat with Qatar and its involvement in the conflict in Yemen — which has drawn worldwide criticism for its brutality — would divert public resources away from the government’s plans to rebalance its economy. However, this is something that Mohammed Abdullah El-Kuwaiz, head of Saudi Arabia’s Capital Markets Authority, is keen to dispel.

“We’re not going to use recent geopolitical challenges as an excuse not to reform the country,” he tells GlobalMarkets. “It is not a crutch or an excuse. Both the public and private sector will not be deterred from the reform agenda and our capital markets reforms will give more confidence to investors.”

Reports in early September that Saudi was redrafting parts of its National Transformation Plan, a key part of Vision 2030, were met with initial concern that the kingdom was backing out of the reforms. But analysts say that the changes make the programme more realistic and are therefore positive.

“The NTP’s commitment to diversification is really there,” says Hootan Yazhari, head of frontier markets research at Bank of America Merrill Lynch in Dubai. “There is a huge amount of backing for the programme with an impetus for change that is seeing government ministries become more sophisticated and familiar withaccountability.”

On the global map

Two big catalysts for Saudi Arabia will be the initial public offering of its state owned energy company, Aramco, and its stock market Tadawul’s inclusion in the major global equity indices.

The kingdom was added to MSCI’s watch list for inclusion in its Emerging Markets Index in June this year. While countries tend to remain under consideration for two to three years, with an additional year for the transition to full emerging market status, El-Kuwaiz is confident that the process will be accelerated for the largest Gulf nation.

“Given the pace of change in Saudi and the delivery of reforms, we are hopeful that the period will be compressed,” he says.

A decision is expected in June 2018.

Investors were hopeful for an announcement at the end of September from FTSE Russell, the index company owned by the London Stock Exchange, on whether it would include Saudi, along with Kuwait, on its list of emerging markets. However, while Kuwait made the grade, Saudi was denied inclusion though FTSE Russell has brought forward its next formal assessment of readiness to March 2018, in recognition of the pace of change in Saudi Arabia. Inclusion should result in a combined total of $4.5bn passive inflows, according to Arqaam Capital. 

El-Kuwaiz says that while EM status would be a “welcome addition” and a “great vote of confidence in the pace and speed of reforms” it is not a goal in its own right.

But investors in the country have no doubt about the huge benefits index inclusion will bring to Saudi.

“They’ve been making some very good progress with MSCI and once Aramco is listed Saudi could make up a very material part of the index,” says Mohieddine Kronfol, chief investment officer, global sukuk and MENA fixed income at Franklin Templeton in Dubai. “It will be a real liquidity catalyst, a significant milestone, and it will get institutional investors to focus on this region. It will also bring in passive money.” 

Kronfol notes that the GCC makes up roughly 2% of the MSCI emerging market index. Including Saudi Arabia, this could rise to 5% and depending on the size of the Aramco listing it could be up to 7%, he says.

International inflows will of course leave Saudi more vulnerable to international volatility. But it is a process that is crucial, according to El-Kuwaiz, and one which will be carefully managed.

“We will need to manage fund flows but it is an opportunity,” he says. “Saudi has been an island of prosperity and our economy has grown multiple times. This model of development has served the country well but we have remained an island in capital markets terms and in cultural terms. There is a growing recognition that in order for Saudi to move to the next stage of its development we can’t be an island any longer.”

Major listing ahead

The Aramco IPO is slated for 2018 or early 2019 and the Crown Prince is said to be targeting a $2tr valuation and to sell up to but not limited to 5%. This could mean an IPO of between $50bn and $100bn, the largest ever.

China, Japan, London and New York are all vying to be the site of Aramco’s secondary listing though London and New York are the most realistic, according to Yazhari.

“China is said to be considering a sizeable share in Aramco and reports suggest they would seek a Hong Kong listing in return,” he adds. “Other reports suggest the Royal family are leaning towards a US listing whilst Aramco management are more in favour of a UK listing.”

What is certain is that Saudi’s Tadawul will house the primary listing, according to El-Kuwaiz. He says that while no official filing has been made, the CMA has been preparing the ground by testing the legal infrastructure. “We’re happy with the recent reforms and are confident that we have the infrastructure to accommodate the IPO,” he says.

He adds that while the decision is yet to be made for multiple listings, the CMA is ready to work with parallel markets. 

Regardless of logistics, Aramco’s listing is expected to be a game changer. “It represents the opening up of Saudi’s capital markets, which will further integrate them into the global financial system,” says Kronfol. “It could be transformative for Saudi and for the rest of the region.”

Bank of America’s Yazhari agrees that the listing will drive investment diversification.

The government plans to transfer its holdings of Aramco into its newly established Public Investment Fund (PIF). This will allow Saudi to recycle its petrodollars into the global markets in the same way that Norges Asset Management began to diversify away from oil, he says.

“When the company is listed, a number of things could start to happen,” says Yazhari. “Firstly it provides a route to lever up and access the debt markets. The shares could be securitized against further loans but most importantly it affords the ability to recycle capital out of Aramco and deploy it in other industries.”

Saudi’s PIF will be the largest sovereign wealth fund in the world.

Great potential

Such potential has not gone unnoticed in  the international investment community.

With a total market capitalisation of over $500bn, Saudi’s stock market, which was formed in 2007, is the largest in the Middle East. It is not one investors can afford to overlook even in its comparative infancy. Global financial institutions have ramped up their interest in the country over the last 12 months with El-Kuwaiz saying that applications for both the Qualified Foreign Investor (QFI) programme and banking licences have surged.

Investor applications have risen from 15 in 2015 to over 100 as of August, and of those 100, 20% have signed up in the last month alone, according to El-Kuwaiz. Citibank was the most recent global bank to receive a full banking licence in April 2017.

The CMA is now working on the third iteration of its QFI programme, which was first introduced in 2015, to further ease restrictions for foreign investors. It is also preparing ground to allow foreign entities to list on the Saudi exchange.

Investors are also noting changes in the pricing and liquidity of Saudi’s local bond markets, which have improved markedly in the last six months, according to Franklin Templeton’s Kronfol. “Up until the last six months, the market was very inefficient with, in our view, no price discovery, no value, no liquidity and very few local investors,” he says. “But recent deals have been managed much better with pricing that is consistent with international issues.”

Kronfol sees a large opportunity for the capital markets in Saudi and his firm has been in talks with the CMA throughout to improve the QFI process and application.

“As long as the government keeps issuing debt, banks will be under pressure to raise funding themselves, which increases the opportunities for corporate issuance,” he says. “There is no shortage of companies with scale and size that could issue benchmark bonds.”

Foreign investor participation in the Saudi Stock Market, or Tadawul, remains low at less than 2% but this is all about to change.

  • By Virginia Furness
  • 11 Oct 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 417,761.51 1606 9.02%
2 JPMorgan 380,362.89 1737 8.21%
3 Bank of America Merrill Lynch 364,928.71 1322 7.88%
4 Goldman Sachs 269,252.76 932 5.81%
5 Barclays 267,252.43 1082 5.77%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 45,449.36 196 6.56%
2 BNP Paribas 38,734.80 217 5.59%
3 Deutsche Bank 37,615.10 139 5.43%
4 JPMorgan 34,724.19 118 5.01%
5 Bank of America Merrill Lynch 33,835.53 112 4.88%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 22,475.46 105 8.65%
2 Morgan Stanley 19,057.00 101 7.34%
3 Citi 17,812.08 111 6.86%
4 UBS 17,693.89 71 6.81%
5 Goldman Sachs 17,333.10 99 6.67%