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Saudi Arabia pushes reforms with opening of stock market

Plans to open $550b market to direct investment by foreigners

Saudi Arabia’s decision to open its stock market to foreign investors is part of an accelerating series of economic reforms.

The kingdom remains deeply dependent on oil exports, leaving it vulnerable to any big downturn in global energy prices and the time, decades from now, when its crude reserves begin running out.

The opening of the $550 billion stock market to direct investment by foreign institutions, announced on Tuesday, is part of efforts to correct this — along with other changes introduced in the past three years including labour market reforms and a new mortgage lending law.

Saudi authorities appear to be calculating that significant changes to the economy can wait no longer — and that with high oil prices swelling state finances, they have an opportunity to make reforms that could become more difficult later.

“I expect more efforts in the reform process over the next five years, given the huge wealth and forecasts that oil prices will remain over $100,” said Abdulwahab Abu Dahesh, a prominent Saudi economist.

Since 2011, the government has shown it is willing to see considerable short-term disruption to the economy as it pursues long-term reforms.

Meanwhile, liberalisation of the civil aviation industry promises to improve services by allowing in new private sector airlines, even though this will put pressure on flag carrier Saudi Arabian Airlines.

The stock market reform is a step in the same direction. The motive is not financial; many big Saudi companies are so rich that they have no need of foreign money.

Instead, authorities hope big foreign fund managers will act as activist shareholders in Saudi Arabia, pushing for improvements in efficiency and better corporate governance while helping to make companies more international.

In particular, authorities want foreign investors to facilitate stock market listings by the family-owned firms which still account for large parts of the non-oil economy.

“One of the main challenges for family businesses is to be sustainable over time across generations,” said Fahad Alturki, head of research at Jadwa Investment in Riyadh. “Being listed on the market facilitates stability and sustainability of these companies.”

There are initial signs of success: last year, the non-oil sector’s contribution to real gross domestic product rose to 78.7 per cent, the highest level since at least 1970, from 62.9 per cent in 1998.