THE PATH TO REFORM LOOKS REWARDING FOR TADAWUL

The Saudi stock market and the Capital Markets Authority have had a landmark couple of years with a spate of reforms that led to Tadawul’s inclusion to MSCI Emerging Market, FTSE Russell and S&P Dow Jones Indices (S&P DJI), the leading providers of global equity indexes.

“We embarked on a new five-year strategic plan in 2018. It is built on a structure comprising seven strategic pillars, under which are 28 initiatives. Within the first year, we embarked on implementing the majority of these initiatives and are making sound progress,” said Sarah Al-Suhaimi, chairperson of Tadawul.

Inclusion of Saudi Arabia into the FTSE Russell Emerging Markets (EM) index will occur in five tranches over the next 12 months, the first of which was completed on 18 March 2019. This initial tranche of 25% will be split over March and April this year (10% and 15%, respectively) to ensure a smooth transition. The remaining 75% will be implemented in conjunction with quarterly reviews in June 2019, September 2019 and March 2020, Tadawul announced.

The Saudi stock market was also included in the S&P Dow Jones Emerging Market Indices’ (DJI) Global Benchmark Indices (BMI) starting on 18 March 2019 with the first of two phases. The second phase will be completed in September 2019. Saudi Arabia is eligible for inclusion at 50% of float-adjusted market capitalisation (FMC) in March, and at 100% of FMC on 23 September 2019.

“Saudi Arabia’s recent move in our country classification to emerging market from stand-alone is a result of an ongoing consultation with market participants,” said Alex Matturri, CEO at S&P Dow Jones Indices. “It reflects the strong consensus among members of the global investment community and recent positive market structure reforms that support foreign investment in the country.”

CMA has been on a reformation drive over the past few years, and has implemented a number of enhancements that paved the way for index inclusion.

“The inclusion into these pre-eminent indices is a testament to growing investor confidence in the Saudi market and reflects the successful implementation of far-ranging capital market reforms in line with the Financial Sector Development Program (FSDP) and Vision2030 that have further enhanced the accessibility of Tadawul to international investors,” said Khalid Al Hussan, CEO of Tadawul.

The Saudi stock market has enjoyed significant attention from major institutional investors who are eyeing opportunities emerging from the kingdom’s Vision 2030 drive.

The Tadawul company enjoyed a stellar 2018, with gross profit rising 14% to SAR 285 million, operating revenue up 6.9% to SAR 583 million in 2018, while operating profits surged 29.2%, as the Tadawul All Shares Index (TASI) grew 8.3% for the year.

Tadawul’s annual report for last year highlights the rise in the number of qualified foreign investors (QFIs) from around 100 at the start of the year to almost 500 at the end, an increase of 400%.

Capital inflows between USD 40 billion and USD 50 billion are expected this year due to the upgrade to emerging market status and the rapid growth in QFIs, Tadawul said in its annual report.

Total market capitalisation rose due to increase activity and the addition of 12 new listings, taking the total number of listed companies to 190.

Other investment-friendly reforms included the launch of a Securities Clearing Centre Company (Muqassa) and the MSCI Tadawul 30 (MT30) index, paving the way for the introduction of derivatives, one of the initiatives under the Financial Sector Development Program (FSDP) in the kingdom's Vision 2030.

There are a slew of initiatives under way that will upgrade Tadawul’s systems and create a world class financial services infrastructure

“A development which is on the cards for the second half of 2019 is the launching of the derivatives market; initially the introduction of index futures to be followed by options and other derivatives,” said Al Hussan

“The Post-Trade Technology Agreement with NASDAQ will take Tadawul’s technology to the next level by replacing the legacy registry, depository and risk management system. This will enable a new counterparty clearing system, facilitate the introduction of new asset classes, and smoothen the process of offering new services to investors.”

The Capital Markets Authority has also raised the secondary exchange, the Nomu Parallel Market for small and medium-sized enterprises.

In a bid to encourage SMEs to take the first step to a public listing, the Tadawul will implement structural changes in two phases. Changes in the first phase include provisions to allow direct listings on Nomu Parallel Market without an initial public offering, easier reporting requirements, establishing access mechanisms by applying minimum liquidity threshold, and introducing Nomu Capped Index.

The second phase will see listing of closed-end funds and real estate investment trusts (REITs) on Nomu, introducing volatility guards and independent research.

The Tadawul is just getting started and has identified 29 initiatives under the seven strategic pillars. These include expanding asset class, developing comprehensive market information and analytics, encouraging more Saudi companies to list, establishing a counterparty clearing house, upgrading technology and operations, diversifying investor base and building an agile, digitised and business-oriented organisation.