When prominent Saudi security analyst Nawaf Obaid starts lectures on the Kingdom these days – sketching out how the regime is handling the threat of internal violence and possible spill-over from the war in Iraq – he points out some very simple numbers: “Saudi Arabia’s 2005 GDP was $308 billion, representing 24% of total GDP of the Middle East/North Africa[Mena] region,” he says. “2006 estimates show the economy will come in at approximately $385 billion.”
Obaid flags up these numbers to remind the world – and especially the United States – that “Saudi Arabia can’t be ignored when it comes to making decisions on Iraq or the wider region.” It is strategically so important because, not only is Saudi Arabia the hub of the Islamic world, but it also remains the biggest oil exporter and the Mena region’s economic giant.
Huge public spending as well as tough policing has helped to calm jihadist pressures at home. The government this year raised salaries for its employees by 15%, at a cost of $8 billion – which is $2 billion less than is allocated to giving a push to infrastructure maintenance and development in the $32 billion Saudi Financing Stimulus Package for 2005-06.
Obaid never fails to mention the collapse in the regional equities market that created such pressure in the first half of 2006. “At its peak during February 2006, Saudi Arabia’s market capitalization reached over $800 billion [and] despite a massive correction, which shed more than $300 billion, it still represents approximately 45% of the region’s market capitalization,” he observes.
The message, shared by senior bankers in Riyadh, is that for all its recent difficulties, the Saudi Stock Exchange (Tadawul) will recover, albeit “a little older but wiser”, an executive says. Already, the market is expected to see a spate of initial public offerings as it wakes up for the autumn.
Fawaz Abdulaziz Alhokair Group is among those to receive Capital Market Authority (CMA) approval for an IPO, offering 30% of its capital in a Tadawul offering arranged by HSBC and its SABB (formerly Saudi British Bank) affiliate.
HSBC is one of the international banks recently allowed to increase its operations in the Kingdom, establishing an onshore investment bank to exploit an increasingly sophisticated market.
“There has been a weakness in core investment banking products here, with no real experience in private equity, IPOs and M&A,” says HSBC Saudi Arabia chief executive Tim Gray. HSBC has led a Sukuk (Islamic bond) for petrochemicals giant Sabic, which will “create a yield curve” for domestic issues, and further bonds are expected to follow.
Post-slump surprise
Such developments reflect the market’s potential – and why most executives in Riyadh believe the Kingdom will emerge strong from its first half 2006 equities slump. The crash hit hard because it followed an unprecedented period of popular capitalism in the Kingdom, with new oil boom wealth trickling down even to the surprisingly high number of poorer Saudis. They responded to an extent that took bankers by surprise: “Bedouin tribesmen and their families made their first ever visits to Riyadh to buy shares and then resell them – a staggering thought in considering how far popular capitalism has come,” the head of a major Riyadh bank tells Emerging Markets.
The numbers registered by the Tadawal All-Share Index and other GCC market indices – in centres such as Qatar and Dubai, where Saudi money also piled in – were staggering: the Saudi market’s capitalization more than doubled in 2005. But in the first fortnight of March the Tadawul lost 30% of its value, and despite periodic rises since, the market remains brittle. “Many new investors sold their IPO shares immediately and are not so affected, but some held and they have lost out,” the bank chief says.
“The market had to come down; the valuations were unreasonable,” says a senior monetary official in Riyadh. Saudi officials were initially comfortable with the correction, but as the market failed to pick up in May, respected regulator Jammaz Al-Suhaimi was sacked as CMA head, to be replaced by former IMF official Abdulrahman Al-Tuwaijri, as the authorities worked to rebuild public confidence.
In mid-August, the Saudi Arabian Monetary Agency (Sama – central bank) said more than 80,000 investors had pulled out of local bank-run domestic investment funds in the first half of 2006. Sama said assets under management dropped by about 21% to SR109.2 billion, year-on-year. This reflected the Tadawul’s slump during the period.
IPO-ing out of trouble
It now falls to Al-Tuwaijri to introduce a new round of reforms, including part-privatizing the stock exchange as part of a wider shake-up that would also see a world-scale financial district being built in Riyadh at breakneck speed.
According to CMA spokesman Abdulaziz Alzoom, the government will transfer Tadawal’s management to a new holding company to pave the way for the IPO, and its name will be changed to Saudi Arabian Financial Exchange or Safe, which will be based in a major new financial services district in northern Riyadh.
In an echo of the sort of hype that Dubai seemed to have made its own in the region, the new King Abdullah Financial District “will be the Middle East’s first financial district on a scale, and of regulatory and technological standards, to match the major global financial centres”, a launch statement said.
The estimated $9 billion district will house the CMA, banks and other financial institutions, with building set to start in 2007 and anticipated to take three years – in the process creating a mini-construction boom in a region where poorer young Saudis need jobs.