The problems that have beset the Saudi stock market can be boiled down to one word: greed. That’s the opinion of Dr. Mohamed A. Ramady, a visiting Associate Professor of the Faculty of Finance and Economics at King Fahd University of Petroleum and Minerals in Dhahran. Ramady is in a position to know: he was a vice president with Citibank when he was seconded to the Saudi American Bank, where he served as the assistant general manager in Saudi Arabia, and at one time was a vice president of Qatar National Bank and a senior advisor to the chairman of Qatar International Islamic Bank. “Those who participated in the Saudi market never thought that once a dose of realism and evaluation of fundamentals take place, what seems inexorably to go up must also come down. Unfortunately, the herd mentality just took over and no amount of logic could prevail,” Ramady, who is also a Fellow of Britain’s Chartered Institute of Bankers and a Council Member of the British Middle East Studies Association, told TRENDS. Ramady explained that in such a market the only way for even rational investors to survive is to go along with the trend. They will join in even when they know it is irrational. All it takes to bring the entire edifice down is for a few investors - or speculators in the case of Saudi Arabia - to jump ship and sell. He said Saudi Arabia needs more stringent controls on insider dealing and market manipulation, and investor training to convince investors of the necessity of a long-term investment mindset. Recognizing the importance of the capital market to individual savers, the Capital Market Authority (CMA) has launched an educational campaign aimed at investors. The CMA has issued a number of investor guides and intends to organize public workshops. Just the start. Ramady believes, however, that education is just the start of fixing Saudi Arabia’s market woes. “Transparency in a real manner and one that is perceived to be fair and just is what is needed,” he says. “To its credit, the CMA regulators have started to ratchet up both the level of punishment and the manner of punishment.” The CMA has issued guidelines and directives specifying the amount and quality of information that has to be revealed by the corporate sector leaders. Jemaz al-Suheimy, the chairman and chief executive officer of the CMA, said the new laws will encourage the formation of more joint stock companies and fairer and more transparent stock market dealings. “This will encourage more Saudis to participate in the financial market and help the market achieve a high degree of transparency and confidence,” he said, and added that the new regulations will protect investors and preserve market credibility. Analysts consider the move a landmark improvement in corporate transparency and governance. “Investors now will be armed with a legal shield to demand the information they need to know. I think we’ll see significant improvement,” said Khalid Al-Jouhani, a chartered financial analyst at Al Rajhi Bank. There are already signs of improvement. Increasingly, companies are penalized for failing to publish quarterly results, and companies whose paid-up capital drops below a threshold are delisted. The tighter regulatory environment has forced firms to look more closely at, particularly, their directors’ responsibilities. The CMA has wide powers to impose tough and, according to Ramady, effective penalties. Matter of honor. “Naming and shaming is important in a society where saving face and the family name and honor count for a lot, and this deterrence was effective in bringing a semblance of investor confidence,” said Ramady. “Whether lessons have been learnt or not is another matter, for what is a matter of honor for one is not so important to another when measured in terms of the monetary gains to be made from speculation and market manipulation.” However, a search on the CMA website for names of companies penalized came up with “no search results.” Prince Alwaleed bin Talal, the chairman of the Kingdom Holding Company, which is to invest more than $1.3 billion in the Saudi stock market, said recently that the stock market was seeking “a new bottom,” and that he had given the CMA three proposals to help rescue the bourse: first, to allow companies to buy their shares; second, to allow non-Saudi companies and nationals entry; and, third, more transparency, where every company would be obliged to fulfill its expectations for its quarterly or yearly results. “It is not acceptable that a company announce that it expects profits worth $26.7 million and then it generates only $2.7 million. The company should be held responsible,” he said. Lessons learnt. Nahed Mohammed Taher, the chief executive officer and an executive director of the Gulf One Investment Bank, told TRENDS there are lessons to be learnt from the market’s failings. “There has to be more effort toward mergers and acquisitions, restructuring, and private equity activities in private and family owned companies to ensure their readiness to be listed, rather than … listing unready companies or trading those with no economic value,” she said. It has been announced that the kingdom’s stock exchange - the Tadawul - will be turned into a state-owned joint stock company, paving the way for an eventual IPO. The new company, to be named the Saudi Financial Market Company-Tadawul, is expected to have a capital of 1.2 billion Saudi riyals ($320.1 million). “This is in line with international stock markets and follows Dubai’s decision to do the same in November 2006. Dubai sold a 20 percent share in its stock market company, and it is most probable that Saudi Arabia will continue to own the majority share following an IPO,” Ramady said. The market needs to evolve to keep up with volumes, which have exploded, he said. The volume of shares traded went from 5.6 million shares in 3.8 million transactions in 2003 to 54.4 million shares in 96.1 million transactions in 2006. The total value of shares traded went from 596 billion riyals to 5,261 billion riyals in the same period. “2006 was certainly a watershed year,” Ramady said. As for market capitalization, it is now between 1,200 billion riyals and 1,300 billion riyals as of December 2006, far lower than the peak of 2,907 billion riyals reached in February 2006. “Given current investor nervousness and sharp market volatility, we expect the Saudi Tadawul index to close at the 9,500 level for year-end 2007 or a market capitalization of about 1,377 billion riyals,” he said. Paternalistic program. Ramady said the government privatization program has been of a “paternalistic privatization” type whereby a minority stake is sold - usually 30 percent - in some key and profitable industries such as telecommunications (STC) or petrochemicals (Sabic). The state retains a controlling share. “It will be a long time before we see full privatization of key industries,” he said, and added, “This is not to say that advanced economies have not adopted the same approach in the sense of selling their holding in the most profitable enterprises first - [Margaret] Thatcher did it with British Telecom to introduce a wider shareholding class in the UK for strategic political and social reasons.” In April, the number of listed companies stood at 86. The sharp falls in the Saudi market have slowed new listings but it is forecast that as many as 45 companies could be listed over the next five years and exceed 200 within a decade. This is still far less than in countries such as Turkey or India, and not commensurate with a 1,3 trillion riyal economy, but the CMA will want to ensure that companies seeking a listing are financially viable, professionally managed and transparent in their reporting. When the market was booming, said Ramady, the public appetite for IPOs was strong, borne aloft by a doubling of the Tadawul index every year from 2002. Seldom did anyone ask awkward questions about fair value or whether the companies being listed would fly. Between 2003 and 2006, 18 new IPOs were floated. High liquidity, limited share availability and the practice of setting a pre-listing fixed price per share - normally 100 riyals - ensured that huge profits were made on the first day of trade. Some IPOs raised as much as $500 million. In 2006, two of the biggest offerings in the Gulf were Saudi Arabian: Emaar Economic City and petrochemical firm Sipchem. Recent IPOs have not fared as well, however. Sipchem and Al Hokair shares traded at below the offer price on their opening day. Days are over. According to Ramady, fixed price IPO listings might be changed to book-building IPOs, where the first day price is not known and depends on orders prior to trading. “This could ease pressure on price building up and avoid a distortion of the actual valuation of the floated company,” he said. “IPOs will still be popular but some blue chip family companies might now reconsider listing and seek capital through private equity, and only those companies that are confident of their future economic growth and of a more rigorous regulatory regime will take the IPO route. The days of quadruple profits on first day trading are over.” Asked about the possibility of attracting foreign investors and institutions to the market, Ramady said it is unlikely in the near future, but a cross listing in the Gulf markets could help bring about a degree of stability. Direct share purchase remains open only to Saudi nationals and citizens of GCC countries. In 2006, foreign residents in Saudi Arabia were permitted access to the market via mutual funds. Unfortunately, the market was by then in free fall. “Foreign direct investment (FDI) is welcome in Saudi Arabia, but under a different avenue through direct investment in projects or the services sector,” he said. Even before accession to the WTO in December 2005, Saudi Arabia had taken steps to liberalize the FDI environment and ensured that foreign companies were not at a disadvantage versus local investors. Ramady said that there does not seem to be much correlation between events on global stock markets and the Saudi market as demonstrated by the recent falls globally when the Saudi market made its biggest gains and then reversed when the global markets picked up. According to him, local investor sentiment, rumor, IPO listings, regional political events and liquidity flows are the prime determinants of the Saudi market, probably in that order.

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