Saudi Vision 2030 is driving growth in the Kingdom of Saudi Arabia’s financial services industry with the market set to stand up tall among its global peers
The Saudi Arabia capital market opened to foreign investors in 2015. While foreign investors could previously access the market through swaps, the inflow into direct equities was a new and welcome phenomenon.
Since then, in a short span of five years, the extent and pace of developments have been very impressive, enriching the market with infrastructure enhancements, enhancements to the regulatory framework, and the introduction of new financial instruments.
With a market capitalisation of $2.20 trillion, Saudi Arabia is presently ranked among the top 10 exchanges in the world.
Madhur Bhandari, head of securities services, HSBC Saudi Arabia, explains that government debt has also been listed on the exchange platform and access to debt has recently been opened to all categories of investors.
“We have seen new product launches, such as derivatives, the publication of rules issued in relation to securities lending and borrowing, and new market infrastructure in the form of Muqassa as the central counterparty as well as a small and medium enterprise (SME) exchange (ie, the Nomu market),” Bhandari says.
In parallel, he explains that market authorities opened new channels for investors to access the market through the depositary receipt (DR) route enabling new investment into the market and facilitating local companies to access capital overseas. The inclusion of the Saudi market in the emerging markets indices and the diversification of investment opportunities has seen ever increasing flows, and Bhandari suggests this has played a major role in attracting new asset servicing players offering a wide array of products and services in the Saudi capital market.
2030 vision
Saudi Arabia is also working on a new strategic framework, the Saudi Vision 2030, to reduce the country’s dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation, and tourism.
Within its financial sector, the initiative aims to develop a diversified and effective financial sector to support the development of the national economy, diversify its sources of income, and stimulate savings, finance and investment as well as projecting Saudi Arabia as one of the key markets in the Middle East and one of the top ten financial markets in the world.
Just last month, Reuters reported that Saudi Arabia’s finance minister said that the Kingdom’s Vision 2030 to diversify the economy away from oil has been “tried and tested”, particularly during the coronavirus pandemic.
“It proved to be the right plan. The economy was able to actually deal with it (the coronavirus crisis), the government was able to deal with it in a very adequate way,” Mohammed al-Jadaan said.
He added that Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, was investing to catalyse the private sector, including in the industrial sector.
Developing the financial sector is a “key pillar” of Saudi Vision 2030 whose implementation saw many essential changes and developments, according to Bhandari.
Some of those developments are aimed at increasing the depth of the Saudi market by increasing the number and diversity of listed companies, relaxing foreign investor access to the market, improving corporate governance norms, enhancing investor protection and confidence through appropriate regulations, for example, anti-money laundering (AML) rules, bankruptcy law, and listing and disclosure requirements.
In addition, the introduction of multiple investment schemes and financial instruments has matched various needs of potential investors to access the markets such as foreign strategic investors, qualified foreign investors, the Nomu market, and full access to the debt capital market.
Bhandari explains that all of these initiatives have “effectively made it simpler for investors to invest, and issuers to access capital — a hallmark of what Vision 2030 was meant to achieve”.
However, he notes that the market authorities aim to continue to do more in this space.
Office openings
The government’s focus on the country’s financial services space has attracted new players to the Kingdom of Saudi Arabia.
In July this year, BNY Mellon received conditional regulatory approval to establish a presence and open an office in Riyadh.
Speaking to Asset Servicing Times in July, a spokesperson from BNY Mellon said: “This is an exciting first step to establishing operations in the Kingdom of Saudi Arabia given the significance of the country to the G20 economy, as a centre of capital markets in the region, and home to some of our most sophisticated institutional clients and new opportunities."
But BNY Mellon is not the only big player to have recently enhanced its presence in the country. In August State Street expanded its Middle East presence by opening an office in Riyadh. In August State Street expanded its Middle East presence by opening an office in Riyadh.
Speaking at the time of the announcement in August, Jörg Ambrosius, head of Europe, Middle East and Africa at State Street, said: “Saudi Arabia itself is a strategically important country for State Street. Having an office here is absolutely vital for us to fulfil our ambitious growth plans for the region.”
Movement and growth in the Middle East were predicted last year during the second Arab Capital Markets Conference in Jordan, when Andy Dyson, CEO of the International Securities Lending Association (ISLA), suggested that securities lending could unlock success in the Middle East.
Dyson explained that some of the largest global investors are located within the region and have actively participated in securities lending for many years, yet the regional domestic markets are underdeveloped.
“We have already seen strong and positive moves in this direction within Saudi Arabia, along with the announcement from the authorities in Bahrain earlier this week to allow short selling and lending.”
Anthony Habis, head of middle east and Africa, BNY Mellon, explains: “The Kingdom of Saudi Arabia is a significant G20 economy, a centre of capital markets in the region and home to many sophisticated investors and financial institutions.”
Businesses are thriving in the Kingdom of Saudi Arabia with home-grown firms increasingly looking to manage the inflow and outflow of capital.
“We work with a wide range of sovereign wealth funds, financial institutions, governments and other clients throughout the region, providing asset servicing and ancillary services, corporate trust and treasury services and have been servicing Kingdom of Saudi Arabia clients for more than 30 years and been conducting business in the Middle East and Africa for over 100 years,” explains Habbis.
However, Bhandari explains that the expansion has not been limited to just this year.
Bhandari says: “Movement comes with the completion of all-inclusion phases of Saudi Arabia to the emerging market indices (MSCI, FTSE Russell, and S&P Dow Jones), Saudi Aramco’s IPO at the end of 2019 and further relaxations of market access to foreign investors.”
“Several capital market firms have continued to expand their focus into the Kingdom and several of them have set up local offices in Saudi Arabia over the past few years,” he adds.
Market challenges
The pace of market developments, while welcome in terms of implementing strategy, at times can become a challenge as all market participants may not have the same level of flexibility to adapt to this change at the pace driven by the market.
Bhandari explains: “It may necessitate a reasonable time span from market participants to adapt and digest.”
The asset servicing industry in Saudi Arabia has also started expanding since the market opening to foreign institutions in 2015 and is a relatively new industry in the Kingdom.
“While there is a great pool of young and upcoming talent in the Saudi market, it can at times be challenging to find people with deep-rooted asset servicing experience,” he notes.
Moving forward
Over the next decade, the Saudi Vision 2030 will continue to drive growth in the country. Bhandari suggests that in turn will result in new opportunities and sectors, new and growing businesses and companies, most of whom will tap the capital markets in some shape and form.
Bhandari notes: “Growth will always look for capital to fund it; there is, therefore, an opportunity for the Saudi capital markets to cater to this through new paper and products to enhance liquidity in existing securities.”
“We will continue to see Saudi allocations grow in existing investor books as well as new investors entering the market through the various schemes available in the market.”
However, growth is always accompanied by risk in various areas, according to Bhandari, and that is where the market authorities can help identify and mitigate this through various mechanisms, several of which are in the planning stages.
He concludes: “Asset servicing providers and professionals also have a key role to play in this respect. All of this augurs well for all-round growth in Saudi Arabia with the market standing up tall among its global peers.”
