THE SLEEPING GIANT

Saudi Arabia 2016 | FINANCE | FOCUS: TADAWUL

The Saudi Stock Exchange (Tadawul) is undergoing a restructuring phase in a bid to unleash the market's full potential. Today, the Saudi capital market is valued at $400 billion, but after implementing the changes the Tadawul is planning on, the market has the possibility to triple or quadruple its size in just 12 months.

The room for growth within the Saudi capital market is huge. If this sleeping giant wakes up, it will change the face of the national and global economy. It is not just about building new things but activating what is already in place. Today, the Saudi capital market is worth $400 billion, an amount that in 12 months could triple or even quadruple.

There are four key measures the Tadawul is working on to maximize its potential. The first is to take more companies public and offer more bonds to finance projects. Second, it is working to set up a better financial market infrastructure. The third move is working to enhance awareness. Finally, it wants to improve its regulatory framework.

There are currently 170 companies listed on the Tadawul. The number of IPOs is low but has growth potential. There are many big companies in the national market that are ready to be listed, and many others that can be ready within a year. The exchange is poised to provide a much-needed capital outlet for SMEs, which have a difficult time finding venues to raise capital. The Tadawul plans to build platforms to support SMEs through either incubators or incentives, products, and services available through the stock exchange.

The Tadawul plans to increase transparency among private placements. All transactions will be registered with the stock exchange, which means all information will be shared and made public. Sharing such data will attract more capital, and investors will know that the Tadawul has the professionalism and standards markets of its size should

Compared to stock markets in advanced countries, the Tadawul lacks a range of products and would benefit from creating some, such as exchange traded funds and exchange traded products in general. Real estate investment trusts would allow landowners to raise capital and develop new projects. Today, the opportunities in Saudi Arabia are only in the equity market but a more diversified supply of products would attract a higher number of investors.

In order to expand horizontally and vertically to new products and markets, Saudi Arabia needs a proper financial market infrastructure. For this to happen, there are some necessary steps to be taken. In this regard, Tadawul is planning to spin off the central securities depository, which today is hosted within the exchange. Another necessary step is to develop the central counter party (CCP). This would be the game changer, as it would be a vehicle to manage and control risk. The CCP is going to be a prerequisite for the Tadawul to expand the range of products. A fully functional CCP is necessary in order to offer plenty of other products that can support further the growth of the market. It will help activate markets that the Tadawul does not have today.

Even though the Tadawul is an extremely liquid market, it still fully depends on retail investors. While 80% of the market is institutional, the remaining 20% is made up of retail investors, who contribute 80% of daily trades. This brings a lot of volatility to the market. There is the need for more education for current and potential investors, so that they can be more responsible and make better decisions.

The Saudi Arabian Monetary Agency (SAMA) has recently announced it has revised its listing rules, a necessary step. SAMA has been working with the Tadawul on a project called “Transition & Activation of Responsibilities." It will be a crucial and historic step for the Tadawul, as it will help the exchange become a self-regulated organization. The Tadawul will issue rules for its stakeholders, participants, and listed companies and will have some fiduciary regulatory duties to support further development.