Saudi Arabia’s vision heralds major market transformation

While much of the world has been focused on Trump and Brexit, the potential unravelling of the European Union, and the prospect of trade spats and ‘de-globalization,’ another wildcard event has garnered far less attention—the economic and social transformation taking place in Saudi Arabia.

The sharp fall in energy prices seen over the last three years mean reform for the world’s largest oil producer has become essential, notes a new report from Insight Discovery and SS&C Advent[1]. So in April 2016 the government published its Vision 2030 strategy, a roadmap for developing the kingdom’s economy and society. More specific details, including targets to be achieved by 2020, were set out in the National Transformation Program (NTP), which followed in June.

Radical change

The initiatives’ objectives are both broad-ranging and truly radical.

Economic diversification is a key plank, to reduce reliance on hydrocarbons, notes the report. There will be increased roles for the private and SME sectors, as well as foreign direct investment (the rules governing Qualified Foreign Financial Institutions’ access to Saudi capital markets have already been progressively liberalized by the Capital Market Authority, although the regulations remain tough).

Huge changes to the labor market aim to include greater participation by women, more non-government jobs and visa exemptions for expatriates who come to work in the new King Abdullah Financial District (KAFD).

A new regional financial hub

The KAFD, a financial hub being built on the north side of Riyadh, is broadly comparable to London’s Canary Wharf. As well as more than 1.6 million square meters of office space, it will include residential apartments, hotels, retail shops, government and community service buildings, conference halls and parks.

At this stage, says the report, the government seems to be looking for the KAFD to develop “in a similar way to the Dubai International Financial Centre.”

As well as the headquarters of the Saudi Capital Market Authority, the KAFD will become home to the Tadawul, the local stock market. Much-needed changes designed to enhance the Tadawul’s efficiency and liquidity—including modifying the settlement cycle for listed securities, eliminating the cash pre-funding requirement and introducing proper delivery versus payment—are due to be implemented by mid-2017.

If the changes are successful, notes the report, “Saudi Arabia will be closer to the point where it can be included in the widely followed Emerging Markets Indices of MSCI.”

Perhaps most eagerly anticipated though is the planned IPO of a 5% stake in Saudi Aramco, the giant state-owned energy company. The transaction could raise US$100 billion, and “will require the large-scale involvement of foreign investors,” observes the report.

All in all, the transformations proposed by the kingdom’s government make it clear there will be much greater engagement with foreign investors and companies going forward—including with financial institutions and the technology providers that supply solutions to the global financial services industry. As such, says the report, there is “a potential bonanza for financial companies.”

[1] The transformation of Saudi Arabia 2016-30: What are the opportunities for financial companies? by Insight Discovery and SS&C Advent

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