Saudi Arabia tweaks rules on foreign investors

• Most stocks unattractive
• Ownership rule tweaked
• 33% of July value from foreigners

Saudi Arabia’s Capital Market Authority (CMA), which regulates the country’s stock exchange, has tweaked foreign-ownership rules for listed companies although the changes seem largely cosmetic at a time when long-term interest among non-domestic investors remains muted.

The revamped regulations newly list six classifications of foreign investors permitted to enter the market, the most important being qualified foreign investors and strategic foreign investors.

The amendments represent the CMA’s latest liberalisation effort, said Tarek Fadlallah, CEO of Nomura Asset Management Middle East in Dubai.

“The CMA has been very successful in developing Saudi Arabia’s capital markets, with the country’s regulatory regime now among the best across emerging markets,” he said.

But Fadlallah suggests ease of access alone may be insufficient, and “the market must be attractive in order for foreigners to invest”.

The remaining foreign-investor classifications are: the ultimate beneficiaries of swap agreements; foreign investors living in another GCC country; ex-GCC residents who opened an investment account while living in the bloc; and foreigners who are clients of CMA-licensed asset managers.

Foreign investors had long been restricted from owning Saudi stocks, gaining exposure only indirectly via participatory notes. Reforms in 2017 permitted direct investment as part of the kingdom’s ultimately successful efforts to be upgraded to emerging-market status.

Under its qualifying foreign investor (QFI) scheme, non-Saudi entities that met certain requirements — such as having at least $500 million in assets under management – could hold up to 49 percent of a Saudi company. The CMA later stipulated no single QFI could own more than a 10 percent stake.

In 2019, the regulator permitted foreign strategic investors to own more than 49 percent of listed companies, providing such entities held their stakes for a two-year minimum.

The revamped rules, published this month, retain these stipulations for foreign strategic investors and qualified foreign investors.

Foreigners accounted for 33 percent of the value of stocks bought on Saudi Arabia’s bourse in July and were net buyers of $541 million of shares that month. 

Yet there are only seven listed Saudi companies in which foreign strategic investors hold stakes exceeding 20 percent, an AGBI analysis of bourse data shows. These include healthcare provider Bupa Arabia (43 percent), Jordanian-run Arab National Bank (30 percent) and Petro Rabigh, a joint venture between Saudi Aramco and Japan’s Sumitomo Chemical Co in which each owns 37.5 percent.

Little-known IT company Edarat has the highest representation of qualified foreign investors at 27 percent, although its market capitalisation is just $288 million and it is part of the smaller Nomu market.

Telecom operator Etihad Etisalat (Mobily), an affiliate of former UAE monopoly E&, is among the four other companies in which QFIs own more than 20 percent but all are still comfortably below the 49 percent limit.

Since the country’s inclusion in the MSCI emerging-market index in 2019, “active foreign investors have not been especially aggressive in buying Saudi stocks,” said Fadlallah.

“Few investors have found a compelling case to invest,” he added.

He cited research by Saudi financial website Arqaam that shows listed Saudi companies’ combined second-quarter net profit fell 16 percent year-on-year.

Excluding Aramco, the decline was 8 percent, while discounting one-off items Saudi companies’ aggregate profit rose 8 percent.

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At a time when Saudi Arabia’s economy is supposed to be firing on all cylinders, even the most positive figure “isn’t especially impressive”, said Fadlallah.

The Saudi stock index has fallen nearly 10 percent this year, making it among the worst performers globally.

“The market is down partly because profits are not increasing by as much as they should, but also because of investor concerns about company prospects,” Fadlallah said, adding, “if they can only grow earnings by this percentage when the government is maintaining high expenditures, what will happen when lower oil prices catch up with state spending?

“Companies must prove that their profits are sustainable in the long term to increase the allure of their stocks.”