Foreign investors' share of trades on Saudi Arabia's stock market, the Arab world's biggest, may increase fivefold in two years after the bourse allows direct purchases, a banker at Royal Bank of Scotland Group said.
Overseas investors buy $400 million (Dh1.468 billion) to $600 million of shares a month using swap agreements and that's "2.5 per cent to 3 per cent of the total Saudi market," Galen Moore, the bank's head of equity delta 1 and financing, a unit that provides equity certificates representing shares, said in an interview in Dubai on Sunday.
"I wouldn't be surprised if in 18 months or two years that figure is more like 10 to 15 per cent of foreign investors in the market."
The kingdom's market regulator is in discussions with international banks to open the exchange to foreign investors in the first quarter, three bankers familiar with the matter said in October.
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Saudi Arabia, the biggest Arab economy, doesn't permit non-resident foreigners to directly own shares in its listed companies. They can trade through share-swap transactions and exchange-traded funds, with the market regulator approving the first ETF in March 2010.
Royal Bank of Scotland began offering swap contracts for Saudi shares in December 2010 and the lender has "built a decent business", Moore said.
"If you are in the Middle East, you have to be in Saudi for its size and the diversification it offers," he said.
The benchmark Tadawul All Share Index has a market value of about 1.29 trillion riyals. That compares with $641 billion for the Bloomberg GCC 200 Index, which includes the top 200 companies from the six-nation Gulf Cooperation Council (GCC) such as Saudi Arabia, the UAE and Qatar.
The Saudi gauge rose 0.1 per cent to 6,562.74 yesterday in Riyadh, taking this year's gains to 2.3 per cent. The MSCI Emerging Markets Index has gained 10 per cent, while the Bloomberg GCC 200 Index dropped less than 0.1 per cent in the period.
The government hasn't set a time-line for opening its market to foreigners, stock exchange Chief Executive Officer Abdullah Al Suweilmy said last month. It allowed citizens of neighbouring Arabian Gulf states to trade shares in 2007.
Saudi Arabia's government has boosted spending in the last two years, including a $384 billion plan to build infrastructure and industrial projects. The economy of the kingdom, the holder of about 19 per cent of the world's proven oil reserves, expanded 6.8 per cent in 2011, Finance Minister Ebrahim Al Assaf said on January 27. He forecast expansion of more than 6 per cent this year.
"Everybody talks about the Bric countries" of Brazil, Russia, India and China, but "the Middle East provides the raw material that fuels the growth to these countries," Moore said.
The Tadawul lists 150 companies, including Saudi Basic Industries Corporation, the world's biggest petrochemicals maker, and Saudi Telecom, the biggest phone company in the Arab world by assets.
Saudi Arabia's "aspiration is to have long-term money in the market," Moore said. With direct access to the market, institutions like the California Public Employees Retirement System, the largest US public pension fund with $229.5 billion of assets, "will now be able to invest," he said.