Saudi Arabia’s stock market, valued at $585 billion, opened up to direct foreign investment for the first time on Monday, as the Kingdom seeks an economic boost amid low global oil prices.
The opening of the Tadawul Saudi Stock Exchange allows companies, particularly those that are not in the oil business, to raise money straight from foreign investors, with the goal of expanding businesses, diversifying the economy and creating more jobs for the Kingdom’s growing population.
The stock exchange’s estimated value makes it the biggest in the Middle East Petrochemical firms make up a fifth of Tadawul, with heavyweights like Saudi Basic Industries Corp. among those listed.
The move comes at a crucial time for Saudi Arabia, whose revenue has suffered from a plunge in oil prices over the past year. That lower revenue could constrain government spending, which in turn would affect the many companies relying on government projects.
An influx of foreign money could “help to plug some of the external shortfall and slow the pace at which Saudi Arabia is drawing down its reserves,” says the London-based analysis firm Capital Economics.
However, foreign investors say they are taking a cautious approach and warn not to expect an immediate rush of foreign investment into the Middle East’s biggest market.
“In the immediate to short term, the money flow will be gradual,” says Sachin Mohindra, Gulf portfolio manager for Invest AD.
One reason for the cautious approach: When local investors anticipated the opening of the market, they bid up stock prices, leaving them overvalued in the opinion of fund managers.
According to Tadawul, Saudi individuals make up 34.4 percent of stock market ownership, but account for nearly 90 percent of trading activity. That has exposed the market to volatility.