Saudi is proving day after day that while hydrocarbons represent vital revenue streams for the country’s economy, it is no longer the sole driver of investments, while also playing a role in financing a diversification strategy away from oil.
With the value of the country’s mineral deposits amounting to approximately $1.3 trn, mining, for example, is slated to become the third pillar of Saudi Arabia’s economy.
A recent Oxford Business Group (OBG) report on Saudi entitled “The Report: Saudi Arabia 2022”, shared with Economy Middle East, discussed Riyadh’s emergence as an international business hub, successfully attracting multinational companies to locate regional headquarters in the capital.
There are also sustained efforts to connect listed firms on Saudi exchanges with international market players, to attract more global investors, and boost liquidity into its capital markets.
The Saudi economy
With increasing oil and gas prices and an expanding non-oil sector, Saudi Arabia has been registering trade surpluses in recent years, while securing government revenue for future investment. Saudi Arabia is among the fastest-growing economies in the G20 in 2022.
Fundamental to the economy is Saudi’s ICT sector, which is primed for considerable expansion in the coming years. Recently, the government shifted many internal processes and public services online, raising efficiency, productivity, and coordination across and between its various ministries.
And while the pandemic is not over, Saudi, which navigated its way successfully out of COVID-19, is widely expected to register 7% GDP growth in 2022, according to the World Bank, while enjoying large trade and current account surpluses accumulating over the course of the year. Some fiscal loosening is likely to be seen in 2023, according to OBG, “it will be undertaken with a well-managed and targeted approach, posing minimal risk to inflation and overall monetary discipline.”
“With these strong fundamentals, Saudi Arabia is expected to witness economic expansion in the coming years, especially as mega-projects are realized and investment in the country’s future sustained.”
Capital Markets
Saudi Arabia’s capital markets have experienced sustained growth, with high-value initial public offerings (IPOs), robust trading, and the Saudi Exchange showing the largest market capitalization and liquidity of any country across the GCC as of mid-2022, according to OBG.
In April 2022 Saudi Tadawul Group implemented a series of post-trade infrastructure enhancements aimed at turning the exchange into a global investment platform.
As of September 2022, the Tadawul All Share Index (TASI) comprised a total of 217 companies. These include participants in 21 industrial sectors, including chemicals, construction materials, and metals. As for the MSCI TADAWUL 30 or MT30, an index representing the performance of approximately the 30 largest and most liquid securities listed in the Saudi equity market, as of June 2022, its top constituent in terms of sector weight was Saudi National Bank, accounting for 14.4% of the index. This was followed by Al Rajhi Bank (14%), government-owned petrochemicals manufacturer SABIC (12.9%), Saudi Aramco (9%), and national telecom provider stc (8.8%).
MT30 is the underlying instrument for the exchange’s first derivatives product, MT30 Index Futures.
Parallel market Nomu, meanwhile, was established in 2017 to provide an alternative platform to the main exchange with lighter listing requirements.
Listing on Nomu requires a minimum market capitalization of SR10 million ($2.7 million) while listing on the main market involves a minimum of 300 million riyals ($80 million).
As of June 2022, there were 31 companies listed on the Nomu divided among 11 industry groups and with a total market capitalization of approximately 34.6bn riyals ($9.2bn).
The Sukuk and bonds market has three indices: the Sukuk/Bonds Market Index, the Government Sukuk/ Bonds Index, and the Corporate Sukuk/Bonds Index, the latter being the largest, with 76 listed government Sukuk and bonds, comprising 67 fixed and nine floating offerings as of June 2022.
Also as of June 2022, the Saudi Exchange listed 17 real estate investment trusts (REITs), up from one in November 2016, when Riyadh REIT became the first listing in the Kingdom and the second in the Middle East. There are also seven ETFs, two closed-end funds (CEFs), and a wide range of mutual funds.
Foreign participation has grown since the government opened the exchange to foreign investors in 2015. The number of Qualified financial institutions (QFIs) rise from 453 at the start of 2019 to more than 2900 as of June 2022. Since October 2019 foreign issuers have been allowed to list on the Saudi market.
Further reform in February 2021 saw a requirement for foreign entities to have a regional headquarters in Saudi Arabia if they wish to be considered for government work and contracts.
IPOs
Saudi has a pipeline of new IPOs in place on the back of a high-performing first half of 2022.
Bloomberg reported a wave of visits by US fund managers to the region to meet with companies looking to undertake IPOs. One example of this was the Saudi luxury residential and commercial property developer Retal Urban Development Company, which attracted institutional orders worth $24 billion for its $384 million IPO in June 2022.
Other IPOs in the pipeline for 2022 include Al Borg Diagnostics, a private lab chain backed by Bahrain-based asset manager Investcorp, which is looking to raise around $350 million from a share sale expected to take place in the second half of the year.
Saudi Aramco Base Oils, or Luberef, is also set for an IPO in the second half of the year, with the potential to raise as much as $1bn from a 30% stake.
A further sign of the robust health of the market in the first half of 2022 was the announcement by stc that the company would increase its capital by SR30bn ($8bn) via the issue of 1.5 bonus shares for every existing share.
“Promoting ESG adoption and reporting has become a strategic goal for the Saudi Exchange, especially given its role in attracting investment, encouraging alignment with global best practices, and strengthening disclosures, transparency, and stakeholder engagement,” said Mohammed Al-Rumaih, CEO of Tadawul, told OBG.
