The transformation of Saudi Arabia; what are the opportunities for financial services companies? – CPI Financial

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In April 2016, the government of Saudi Arabia published its Vision 2030 Strategy. This is a general ‘roadmap’ for the country’s development, and the diversification of the economy away from hydrocarbons. 

Two months later, the National Transformation programme (NTP) identified specific targets that are to be achieved by 2020.

The International Monetary Fund (IMF) has indicated its strong support for the reforms that are envisaged in Vision 2030 and the NTP. 

Together, they represent the response of the government to its most pressing strategic challenge of the last three years: the fall in the price of oil. IMF figures show that the net foreign assets of the Saudi Arabian Monetary Authority (SAMA – the central bank) slipped from $724 billion at the end of 2014 to $543 billion at the end of 2016.

Both programmes are very broad in scope, envisaging changes in the tourism, housing, education and healthcare segments as well as drastic changes to the Kingdom’s public finances.

However, they also include major new opportunities for financial services companies, some of which will emerge in 2017. 

By the middle of 2017, the Saudi Stock Exchange (Tadawul) should have implemented a number of changes, such as the introduction of proper delivery versus payment, the elimination of the cash prefunding requirement and new rules for Qualified Foreign Financial Institutions (QFIs). In the view of MSCI, these initiatives will bring the Saudi equity market closer to MSCI’s accessibility standards.

The government is also looking for the King Abdullah Financial District in Riyadh to develop in a similar way to the Dubai International Financial Centre (DIFC).

To make it easier for expatriates to do business in the KAFD, the government is looking at a major relaxation of the rules for issuance of working visas.

Together, these changes are consistent with far greater integration of Saudi Arabia’s financial sector – and economy – with those of the rest of the world. This is in the context of a country competitiveness and a business environment that are middling by global standards, according to the World Economic Forum and the World Bank.

Over recent months, headlines in the mainstream and financial media have highlighted the government’s plans to raise around $100 billion from the initial public offering (IPO) of a five per cent stake in Saudi Aramco, the state owned energy company. The IPO could take place as early as this year.

Assuming that the deal goes ahead, it will be by far the largest IPO ever. To date, the largest IPO was that of Chinese online retailer Alibaba, which raised $25 billion in 2014. Other landmark deals that have raised $15-21 billion include the IPOs of AIA Group (2010), Visa (2008), General Motors (2010) Enel SpA (1999), ICBC (2006), NTT Docomo (1998) and Facebook (2012).

Whether it happens in 2017 or in a later year, the IPO of Saudi Aramco paves the way for an even more fundamental change. The government has indicated that it eventually wants to transfer its shares in Saudi Aramco to the Public Investment Fund (PIF), the Kingdom’s Sovereign Wealth Fund (SWF).

If this happens, then the government will no longer rely for much of its income on direct revenues from the energy sector. Instead, the government’s exposure will be indirect, as an investor in PIF. 

The IPO will define the notional value of all of Saudi Aramco. Ultimately, the size of PIF will soar, with the result that it is substantially larger than Norway’s Government Pension Fund, which is currently the world’s largest SWF in terms of total assets.

Another opportunity, as envisaged by the IMF, is the potential for foreign institutional investors to help fund the massive infrastructure projects that are envisaged for the Kingdom through Private Public Partnerships (PPPs). 

The PPPs will give rise to new debt and equity securities. There will be far greater transparency in the funding of infrastructure projects than there has been in the past.

In short, many of the changes are consistent with the transfer of global best practice to the Saudi markets, as well as a general movement towards greater transparency. These are trends that the world’s leading fund administrators and providers of technology and outsourced solutions are well placed to support.

World class technology  has long been a game changer for financial services companies given that it boosts efficiency and lowers costs. It will likely play a key role in the transformation of Saudi Arabia.

Changes to the rules affecting Qualified Foreign Financial Institutions (QFIs), announced in August 2016

  • Minimum assets under management (AUM) of QFIs lowered from $5 billion to $1 billion.
  • Types of eligible QFIs broadened to include governments and government-related entities.
  • Removal/ relaxation of ownership thresholds/limits for QFIs
  • QFIs may engage with Saudi or non-Saudi asset managers to manage investments in Saudi capital markets.

 Aims of QFI rules

  • Addition of expertise of international investors to the Saudi capital markets
  • Enhancement of market efficiency
  • Encourage local listed companies to boost transparency and governance
  • Increase level of research and evaluation
  • More accurate information and better valuations of companies

 

Source: Capital Market Authority (CMA) of Saudi Arabia, Press Release of 10 August 2016

 


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