Financing the Kingdom’s Stable Economic Future

 

 

Richard Banks, Regional Director, Euromoney Conferences, gives an exclusive interview to Capital Business in the build-up to the Euromoney Saudi Arabia Conference, providing insights on the Kingdom’s financial success following the global financial crisis, economic diversification, and booming stock market.

 

How do you describe the financial status of the Kingdom of Saudi Arabia after the global financial crisis?
 

The Kingdom of Saudi Arabia is the Arab world’s largest economy, a source of regional stability and a cornerstone of the global economy.

During and after the global financial crisis, oil exporters were able to absorb economic shocks by providing capital and guaranteeing deposits.

To shield against future economic slowdowns, especially if it were to affect oil prices, the Kingdom’s leaders are increasing budgeted government expenditure to a record SAR 855 billion in 2014, particularly in education (SAR 210 billion), healthcare (SAR 108 billion) and infrastructure (SAR 66.6 billion). Government spending is set to help boost the Kingdom’s economy to its projected 4.0 percent real GDP growth in 2014, and will particularly support educational institutions and students studying abroad; medical and recreational facilities; transportation, ports and airports, as well as industrial projects.

The Kingdom’s domestic sectors of construction, retail, transport, manufacturing, and communications are all posting strong growth. Meanwhile, the Kingdom is also driving non-oil exports to boost economic diversification, which reached a record SAR 206 billion in 2013, a rise of 9.2 percent from 2012.

SAGIA is making strong progress on rapidly developing four industry-specific economic cities, which are slated to generate US$ 150 billion in GDP and create 1.3 million jobs by 2020. In all, the Saudi Arabian economy has emerged stronger and more balanced following the crisis, although challenges remain.

 

How was Saudi Arabia able to become the Arab world’s biggest stock market?
 

Growth has been driven by demand from within the Kingdom. Saudi Arabian companies are increasing looking to raise funds via the Tadawul, creating a strong pipeline of upcoming IPOs.

Thus, Tadawul is now the Middle East’s largest stock market, currently trading 161 companies and posted 28.97 million trades for a total value of SAR 1.37 trillion in 2013.

Tadawul's strongest growth sectors in 2013 were domestic mid-cap, including retail (55.9 percent), real estate (42.4 percent), food and agriculture (39.5 percent), and construction (24.2 percent). Long-term, the large cap sectors like petrochemicals, telecom, and banking have higher upside.

What’s interesting is that much of the current market activity – around 95 percent – is on behalf of retail investors. This means that there is significant scope for growth when and if the market is opened to external investment.

 

What efforts have been made to develop the stock exchange sector in this country further?

 

We see that the authorities are undertaking important reforms, with a regulatory framework being set in place to allow foreign direct investment, based on a best practice model. The Kingdom has made important steps to prepare for this.

Currently, retail investors make up about 95% of trades, with the remainder from institutional investors. Flipping this ratio will demand new regulation on both sides of the market and will also mean adapting to the international standards that foreign investors will expect.

We have seen strong progress on this in recent years.

Thanks to a strong economy, robust banking system, institutions to manage foreign investment in equity markets, and a track record for managing banking liquidity, one recent report noted that Tadawul is “ready for foreign investors.”

 

How are local companies in Saudi Arabia looking to raise funds?
 

Local companies in Saudi Arabia are increasingly looking to raise funds via the Tadawul and IPO.

In addition, Shariah-compliant finance, particularly sukuk, is playing a bigger role in financing projects across the Kingdom, as sukuk is seen as a safer, long-term financing tool. The Kingdom’s public and private sector issued a combined US$ 8.69 billion worth of sukuk during the first nine months of 2013, making it the largest sukuk issuer in the Middle East and North Africa.

As Islamic finance, and especially sukuk, matures and diversifies, the Kingdom is set to offer its leading best practices to countries around the world that are only now discovering the power of Islamic finance.

 

Please give us more details about the fastest-growing capital markets nowadays.

The Middle East has some of the world's fastest-growing capital markets. With populations getting younger, better educated and more demanding; increasing diversity in financial products and services; and growing regulatory requirements for better monitoring of processes and developing secure financial systems, banks and financial institutions across the region are investing heavily to match or outstrip their international peers.

The role of the financial sector in promoting growth is now widely recognized. The evidence is that a large and competitive banking sector, and liquid and active equity and debt markets, operating according to market principles and intermediating savings (domestic and foreign) for market-based investment, are strongly associated with higher growth rates.

 

What are the main challenges these markets have to deal with?

Turbulence and uncertainty affect all capital markets. Look at markets in Asia – they have seen major growth in recent years, and have had a difficult 12 months as investors have reassessed sources of global growth and risks, and capital has flowed back into stabilizing developed markets in the West.

It is in the nature of the fastest-growing markets that the reversals and changes in fortune can be equally rapid and often uncomfortable.

 

How is Euromoney helping financiers and investors in this country?
 

We are the longest-running, largest and most influential financial conference in the Kingdom, and were named the best national and regional conference on the Saudi economy in a Cabinet Communique from the Council of Ministers released on 13 May 2013.

The Euromoney Saudi Arabia Conference is a must-attend for all financiers, investors and corporates working in and with the Kingdom. The exclusive invitation-only event combines key speakers, topics, and debates under one roof, and is expected to host over 1,200 delegates from all over the region and the world.

Leveraging Euromoney Conferences’ experience and global connections, attendees can hear the latest financial developments from key industry players, learn about wide-ranging investment opportunities, network with the leading figures in the global financial market, and discover new companies and products.

In line with the event, we continued the momentum by hosting the UK Saudi Investment Forum on the 20th of May in London, in partnership with SAGIA, to further drive new business opportunities between the UK and the Kingdom.

 

* Interview conducted by Jenny Kassis

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