By opening its stock market to foreigners and building a financial district in Riyadh, could Saudi Arabia seize prominence as the Gulf regionâs financial hub? Not for some time, finds Dave Waller.
In July, Saudi Arabia’s Capital Market Authority announced plans to open the country’s equity markets to international investment. Set to occur in the first half of 2015, this decision has huge ramifications: hungry overseas investors will suddenly find themselves staring at a liquid market worth $590 billion. That equates to around half of the entire Gulf region – about the same as Russia – and puts Saudi seventh out of 58 emerging or frontier markets for scale.
That Saudi Arabia is also investing $7.8 billion in constructing the King Abdullah Financial District in Riyadh suggests it is serious about becoming a major player on the global finance stage. No doubt Dubai, which has established a reputation as the leader among the region’s financial centres, will be watching with a keen eye.
Investors will be drawn to the diversity that Saudi stocks would lend their portfolio – helping to lower overall risks without sacrificing returns. And Saudi boasts liquid and diverse assets, in everything from petrochemicals to technology and construction, real estate, banking and retail.
“Real estate and retail in particular have grown exponentially in Saudi in the last couple of years and the country has generally given very stable returns, especially during the financial crisis,” says Anum Saleem, senior executive at Eversheds in Saudi Arabia. “Some funds generate a return of around 30%, investing in only local equities. I’m sure we’ll see more and more asset managers coming in.”
So, should Dubai – or, for that matter, Doha and Bahrain – be concerned? Not necessarily. For one thing it won’t be a free-for-all. Saudi will implement a Qualified Foreign Investor (QFI) scheme, allowing access only to a limited portion of its domestic market. Foreign investors in aggregate will only be allowed to hold 10% of the whole market, and the maximum combined holding of all QFIs in an individual stock will be 20%.
Contrast this cautious approach with that of Dubai, which in the past ten years has risen from a standing start to become a financial hub serving the immediate region as well as the growth markets of Africa, India and, increasingly, Asia. The key?
It was outward-facing from the beginning, creating free zones such as the Dubai International Financial Centre (DIFC) to suit the needs of international asset managers. Now, Dubai is thriving, and additional investment is coming in all the time.
By contrast, Saudi’s financial services industry has always been more inward-looking, its borders more restrictive to the flow of capital, and it will take time for that to change.
“I’d love to see a more open and free centre in Saudi, but that will constantly get undermined by the desire to make it more robust domestically,” says Prathit Harish, a partner at PwC FS Advisory Services in Dubai.
“It’s not as easy to enter, exit and buy real estate assets in Saudi as it is in Dubai, for example.”
There’s also the issue of lifestyle. Saudi Arabia may struggle, or indeed have no desire, to create the kind of liberal environment that has drawn so many international finance professionals to Dubai. Building the Abdullah Financial District would be an achievement, but many in the region think it unlikely that the centre will have the dynamism and diversity that has attracted so many skilled overseas professionals – and not only from the West.
“Dubai is smack bang next to two billion people in India,” says Ali Hassan, senior representative of the DIFC for Europe and North America, who is based in London. “India is churning out graduates in finance, so the cost of hiring qualified professionals is lower.” Hassan also points out that expatriates are staying longer in Dubai these days. “It used to be three years and go home,” he says. “Now it’s longer. I was there for eight years. Others I was with are still there after 12.”
Saudi Arabia is at least heading in the direction of more openness. Airport officials seem to have become friendlier, and more Saudis are visiting Dubai and Qatar and beginning to see how much their neighbours have grown by developing their relations with expatriates. Yet things are still slow. “To come anywhere close to Dubai will take another 10-15 years,” says Saleem, of Eversheds. “And I don’t think opening up the Saudi market will do it to a large extent.”
Saudi’s restrictions on foreign ownership mean it may not win a coveted space in MSCI’s Emerging Market index for some years. If and when it does, Saudi will start to benefit from those first foreign investors attracting more of their sort, which in turn should encourage more local companies to list, and so on. But even when this happens, Saudi may prove to be less competition for Dubai, and in fact a further boon. Around 70% of the region’s GDP is in Saudi. If it becomes stronger and more open that can only serve to help Dubai which, already a hub, will simply grow to service that extra work in Saudi as well.
“There are a number of organisations in Dubai who cover the whole region but have partnerships with local players, especially in Saudi,” says Harish. “Local partners on the ground provide the market access and distribution, but they’re managed in Dubai. So any development in Saudi will be complementary. Investor sentiment in the region will only become stronger, and that will allow for a regional model like Dubai’s to become even more successful too.”
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