Whenever I arrive in a country, I like to read the local press reports to see the issues of the day. In Saudi Arabia, it was clear what one of the biggest issues—if not the biggest issue—in the news was oil prices and their impact on the economy. When oil prices began to decline from their peaks in 2014, Saudi Arabia’s financial health began to face great pressure. Rating agencies downgraded the country’s debt ratings because of the negative impact of the continued low-oil-price environment on its fiscal and external balances. Earlier this month, I attended the Euromoney Conference in Riyadh, which took place under the patronage of the Ministry of Finance and was supported by the Ministry of Economy and Planning as well as the Capital Markets Authority. Top leaders discussed a series of economic and market reforms that could attract billions of foreign investor dollars to the Kingdom, and I had the pleasure of giving an interview on stage at the conference encouraging reform and expressing optimism for the future of the country’s capital markets. The Saudi finance minister reported that the Kingdom had continued to pursue structural reforms even in the face of a challenging global environment and that the financial condition in the Kingdom was very stable. Nevertheless, the country’s finances were under pressure due to the collapse in oil prices, prompting deep budget cuts and energy subsidy reforms. The situation certainly warranted attention, and a proposed solution came in four numbers: 2030. This spring, Saudi Deputy Crown Prince Mohammed bin Salman announced the “Vision 2030” plan to transform the economy away from oil dependence in the next 14 years. The plan has three themes: “A Vibrant Society,” “A Thriving Economy” and “An Ambitious Nation.” Each area offers an ambitious blueprint to drive Saudi Arabia into the future—one that is more economically diversified. With the unveiling of the Vision, the Deputy Crown Prince announced plans to end its “addiction” to oil in as little as four years’ time. This marks a very ambitious attempt which is unprecedented in Saudi Arabia’s history. His idea is to rapidly develop the private sector and service industries so Saudi Arabia could “live without oil” by 2030. Both print and social media in Saudi Arabia have drawn attention to past problems, including stalled projects. The new program recognizes these historical issues and includes the establishment of an office for the administration of projects. Goals within Vision 2030 include raising the private sector contribution to the economy from 45% to 60% and cutting unemployment from 12% to 7% within the next 14 years. Observers have remarked on the personal authority of the 30-year-old son of King Salman bin Abdulaziz and how he has been making very important decisions. But he will likely be running up against resistance from parts of the royal and clerical establishments in what is a fundamentally conservative country. Some wonder if the scope of the transformation envisaged is possible in a country that has become accustomed to the state providing cradle-to-grave services. With half the state budget reserved for public-sector salaries, shifting even part of the wage bill to the private sector would ease fiscal pressure, but these newly created independent businesses might well choose to cut bloated staff levels, creating sources of unrest. In neighboring Kuwait, for instance, oil workers had recently gone on strike to protest modest reforms that they feared would lead to a cut in salaries and benefits. Of course, there was a lot of discussion about Vision 2030 and these sorts of issues at the conference in Saudi Arabia I attended, but there was a great sense of enthusiasm for it. Market Reforms = Wider Access As global investors, of course market reforms are of keen interest to us, and the Saudi Arabian stock market regulator (the Capital Market Authority) has agreed to change some of the rules for foreign investment as part of its efforts to open the country’s capital market under the economic diversification plan. In the past, foreigners were not allowed to make direct investments in the market and had to use Saudi proxies (P-notes) to make investments. Then the door was opened slightly in a QFI (Qualified Foreign Investor) program, which allows a foreign investor to invest as long as he had assets of at least US$1 billion (cut from the original US$5 billion). Also, the prior foreign ownership limit of 5% of the shares outstanding in a single company will be raised to 10%, which should also encourage wider foreign participation. One reform includes changing the trade settlement cycle from T+0 to T+2, which means trades (T) that currently must be settled the same day (0) could be settled in two days. Same-day settlement is next to impossible for foreign investors who need to work through custodial banks that hold the securities on their behalf, so this reform should help encourage wider participation. Another reform involves elimination of cash pre-funding requirements, which again is disadvantageous for foreign investors who can’t have money tied up in the country waiting for a trade to take place. A further planned change is the introduction of proper delivery versus payment (DVP). Currently, delivery does not take place simultaneously with payment and vice versa, which is quite risky if one of the parties to the deal fails to deliver. These are certainly positive developments, in our view, and are in line with what has been a gradual market opening. They also set a clearer roadmap to an eventual inclusion in the important MSCI Emerging Markets Index, which in itself will likely be transformative for the index and the emerging-market universe given the large size of the Saudi stock market—one of the world’s largest with a market capitalization of more than US$380 billion.1 Liquidity is an important factor, and while average daily liquidity of Saudi shares is already high, if more shares are listed, we think the stock exchange would be even more attractive to foreign investors. Thus, there was considerable excitement upon...
Investment Adventures in Emerging Markets - Notes from Mark Mobius
Mark Mobius, Ph.D., executive chairman of Templeton Emerging Markets Group, joined Templeton in 1987. Currently, he directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios. As he spans the globe in search of investment opportunities, his “Investment Adventures in Emerging Markets” blog gives readers a taste for what he does, when, where, why and how. Dr. Mobius has written several books, including “Trading with China,” “The Investor’s Guide to Emerging Markets,” “Mobius on Emerging Markets,” “Passport to Profits,” “Equities—An Introduction to the Core Concepts,” “Mutual Funds—An Introduction to the Core Concepts,” ”The Little Book of Emerging Markets,” and “Mark Mobius: An Illustrated Biography."
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