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How the Tadawul and Capital Market Authority are positioning Saudi capital markets as a global leader: Over the past several years, the MENA region’s capital markets “have transformed quite significantly — from small, locally driven outfits to major global hubs that are becoming a growing constituent of the MSCI Emerging Market Index,” EFG Holding Group CEO Karim Awad said at the EFG Hermes Annual Conference in London earlier this week. This transformation has been most apparent in Saudi and the UAE, Awad noted, “where even amid global and regional turmoil, their capital markets have shown remarkable resilience with the recent IPO flow that is among the most active globally.”
Saudi capital markets in particular have seen marked growth underpinned by a growth and regulatory strategy geared towards placing the Kingdom as a leading global capital market, Saudi Exchange CEO Mohammed Al Rumaih and Capital Market Authority (CMA) Board Commissioner Abdulaziz Abdulmohsen Bin Hassan said in a fireside chat at the conference.
“You name the metric, it’s seen double- or triple-digit growth in the past five years,” Bin Hassan says, pointing to qualified financial investors (QFIs), asset management, the debt market, and the number of financial institutions.
It was about finding out what investors were lacking in terms of incentives — and delivering on that, said Bin Hassan. “When the first QFI started back in 2017, there was a big constraint on the QFIs themselves. Since then, the CMA worked on relaxing the regulations itself to have more QFIs. So, for example, now you don’t have to be a financial institution,” he said. Instead, regulators now allow any institution that meets the minimum requirement of USD 500 mn in assets under management to access the Saudi market. Regulators also made it easier for non-resident foreign investors to enter Tadawul’s parallel market, Nomu, without meeting QFI requirements, Bin Hassan noted.
“We continue to think about and work on how we can make it easier for investors,” Bin Hassan said.
The same rationale applied to encouraging new paper in the market, according to Al Rumaih, who looked at the growth in the volume of listings on the Tadawul over the past several years. “Last year, we had 35 listings. As of today, we’ve had 35 listings year-to-date, and we expect that figure to surpass 50 by the end of 2024. That’s compared to 2018, when we had maybe five listings over the course of the year,” Al Rumaih said.
In addition to the growth in volume, listings today also have much more diversification in terms of industries, sizes, and markets, as well as instruments such as ETFs, close-ended funds, and REITs, Al Rumaih noted. The growth in listing activity came on the back of the CMA-led Financial Sector Development Program, which focused on growing the number of listings in Saudi.
“If you look back to 2017, we had around 100 listed companies. For an economy like Saudi Arabia, that’s a very small figure,” Al Rumaih said.
The program focused first and foremost on addressing why companies were disinterested in going public, Al Rumaih said. “They had a valid reason — a lot of disclosure without a lot of benefits. Although the liquidity was always there, there were no tools for companies to get the liquidity they needed to grow their businesses.” Back in 2017, Saudi capital markets lacked the diversified investor base it currently has. Fast forward to today, most companies that previously had zero foreign investors now have 5-10% of their shares in the market held by foreign investors.
Then there was the creation of Nomu: Some companies did want to list, but wanted fewer requirements, which is why regulators set up Nomu and also looked at different ways to enter the market, such as introducing direct listings — which cut down on listing time and costs, Al Rumaih noted.
It’s been half a decade of substantial growth, but there’s still more potential to tap into: So far this year, there are more than 50 listing applications under review, “so this pipeline is very healthy and will continue to grow as we are opening up more ways for companies to become listed,” Al Rumaih said. Moving forward, regulators “continue to think about and work on how we can make it easier for investors,” Bin Hassan said. “We’re aiming to not just be one of the financial centers of the world, but also to be one of the most important ones.”
The CMA is set to announce today a fresh strategy for the next three years outlining plans to further develop the country’s capital markets, Bin Hassan said. Among the priorities moving forward as regulators work on “continuously improving and developing the market” is increasing efficiency, adopting the best international practices, and improving infrastructure, Bin Hassan and Al Rumaih said.
That potential also lies in debt capital markets, which remains underdeveloped: “If we talk about equity markets — ETFs, asset management, etc — we’re relatively mature there, but the most important thing we’re working on at the CMA with our partners in the financial sector is the debt capital market (DCM),” Bin Hassan said. By developing the country’s debt market, the value of becoming a listed company will also grow, Al Rumaih noted. “So by being a listed company, you would have more — or better — access to funding, which is essential to a company in a growth stage,” Al Rumaih said.
The Saudi debt market, valued at around SAR 700 bn, is very big — “but similar to the equity markets a few years ago, we are way below the benchmark when comparing the market to the size of the economy,” Al Rumaih said. Whereas G20 countries see their debt markets representing 30-40% of GDP, Saudi’s debt market represents 18% of the Kingdom’s total GDP, leaving “room to grow,” he noted.
What’s holding companies back from tapping debt markets to finance growth plans? Regulations are a core factor, Al Rumaih said, noting that these regulations are being revamped “to reduce the requirements and redundant information, especially if you are a listed company, which should provide the advantage of being known to the investors.” Regulations should allow access to the debt market to be a short, easy, and cost-effective process, he said. “The debt market is very important to us because it is very important to the economy.”
In addition to regulatory changes, there are also new systems being introduced: “Coupled with the revamp of the offering and listing rules, we are planning to introduce the capital management system, which we’ve tested in the parallel market to great success. What we expect is that the companies using the CMS can access a good pool of liquidity in a very cost-efficient way,” Al Rumaih said. Officials expect that these changes will help companies “look at the debt market as the main source of funding and maybe replicate the success that we are having in the equity market” within the next 2-3 years, he said.
Meanwhile, regulators are also pushing forward with ESG performance standards: While the CMA has been supporting the implementation of ESG regulations, but “it’s still the beginning,” Bin Hassan said. The CMA is working with the Supreme Committee for Investments on putting together standardized ESG regulations that would provide investors with greater clarity, he said. “We think in the next few years you’re going to see a more developed ESG landscape in the Kingdom itself as part of its overall vision,” Bin Hassan said.
Vision 2030 — which encompasses sustainability as a key pillar — was an important driver for the Tadawul to also push for sustainability among companies, Al Rumaih said. “We found that the majority of companies are already sustainable — they are already following the corporate governance code, which is one of the best in the world, and they’re working towards more environmentally-friendly ways of doing business.” After publishing guidelines on ESG reporting two years ago, some 8% of listed companies disclosed their ESG practices, while that number has grown to 30% this year, Al Rumaih said. The surrounding ecosystem has also developed to encourage more ESG reporting, with more consultants now available to support in implementing ESG practices and reporting on them, Al Rumaih said. “We are very optimistic about the future of the economy being more sustainable and how our companies are reacting to it.”
