As its economy opened up, millions of Saudis bought into the kingdom’s initial public offerings boom. “Bedouin tribesmen and their families made their first ever visits to Riyadh to buy shares and then re-sell them – a staggering thought considering how far popular capitalism has come,” the head of a major Riyadh bank told Emerging Markets. His comments were off-the-record, pointing to the continuing sensitivity of the crash of 2006 in Saudi banking – and political – circles.
The crash in mid-May cost Jammaz Al-Suhaimi his job. The respected regulator had been instrumental in establishing the Capital Markets Authority (CMA), whose creation in 2004 opened the way for the Saudi market to open as never before. The local market, with new oil boom wealth trickling down even to the surprisingly high number of poorer Saudis, responded to an extent that took bankers by surprise.
The numbers registered by the Tadawal All-Share Index and other GCC market indices – in centres such as Qatar, Dubai and Bahrain where Saudi money also piled in – were staggering: the Saudi market’s capitalisation more than doubled in 2005. But in the first fortnight of March the Tadawul lost 30% of its value, despite the authorities imposing a limit of a maximum 5% daily losses and gains, 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,” said a senior monetary official in Riyadh, also speaking off the record. Like other Saudi officials, he was initially comfortable with the correction, but as the market has failed to pick up as the government would like nerves have become brittle.
The respected and well-liked Al-Suhaimi was a likely target – and such was local sentiment that the Tadawul rose a full 17% after an announcement in the name of King Abdulaziz Bin Abdulaziz Al-Saud said he would be replaced by former IMF official Abdulrahman Al-Tuwaijri. He has a busy agenda: Al-Suhaimi’s last high-profile job at the CMA was to announced that Riyadh would tackle investor jitters by part-privatising the stock exchange – now the largest in the Arab world – as part of a wider shake-up that would also see a world-scale financial district being built in Riyadh at break-neck speed.
IPO-ing out of trouble
The Saudi Stock Exchange (Tadawal) is planning an initial public offering later this year, in a bid to restore investor confidence and boost demand for shares. The new exchange “will become a private sector corporation based on the leading-edge international model for exchanges... [with] a mandate to develop a range of products and services that are vital to the development of our capital markets and the competitiveness of our securities industry,” Al-Suhaimi said soon before his ouster.
According to Abdullah Al-Suweilmy, the exchange’s general manager, “we’re doing a price valuation of the exchange, but it’s still too early to say what the market is worth.” There is no decision yet on how large the floatation will be. The government has a record of divesting 30% stakes, but Al-Suweilmy has hinted that the kingdom will go further this time and could, potentially, sell a majority stake to investors. 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.
The bourse’s name will be changed to the internationally-friendly Saudi Arabian Financial Exchange, and SAFE will be relocated to a grandiose new financial centre in the north of Riyadh – another plank in the authorities’ grand plan to remake the Saudi financial sector.
Haven for SAFE
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 press statement said.
Apart from SAFE, the district will house the CMA, banks and other financial institutions. Building will begin next year in the north of Riyadh and is anticipated to take three years – in the process creating a mini-construction boom in a region where poorer young Saudis need jobs. The KAFD will cover a total 1.6 million square metres, with floor space reaching 3 million square metres. Projected costs are likely to top $9 billion, but the government is confident it will take Riyadh into pole position as the Middle East’s financial capital.
“People tend to try to jet in here from Bahrain and Dubai, do their business and jet out, but those days are fast going – the Saudi view is increasingly ‘base here or get out’,” one expatriate financial services professional told Emerging Markets. He and several colleagues in the past year had relocated from Dubai to Riyadh to build up business in by far the Gulf region’s biggest economy. The advent of a more tolerant environment under King Abdullah Bin Abdulaziz Al-Saud means, “you can’t drink or date easily, but Riyadh is not such a bad place to live,” he says.
HSBC has established an onshore investment bank, complementing its existing Saudi British Bank operation, 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 Tim Gray, HSBC Saudi Arabia chief executive. HSBC has been leading a planned Sukuk (Islamic bond) for petrochemicals giant Sabic, which will “create a yield curve” for domestic issues; further bonds are expected to follow.