Equity Market in Saudi Arabia

Equity Market in Saudi Arabia

Saudi Arabia is the largest exporter of oil, feature which translates into the economy's great dependency on oil revenues. In more recent years however, the authorities at Riyadh have implemented several policies to support an economic growth through diversification, which would resolve several social issues, such as a high unemployment level, a significant income gap between the oil exporting parties and the rest of the population, or the fact that the young Saudi Arabians are poorly educated and have few prospects for the future (Central Intelligence Agency, 2009). With this objective in mind, more support has also been offered to the development of the equity market.

Funding through equity has been an existent opportunity for people conducting business in Saudi Arabia for two decades now. Its feasibility was however limited until only recently. To this day, Saudi Arabia does not possess a derivative market, a hedge fund market or a securities lending market. It is nevertheless a promising emergent market, despite the youth of its capital market. Returning to the equity market, its actual role came in force in 2003. Prior to this year, the market was present more in a theoretical context, with its practical applications being virtually inexistent. Yet, with the 2003 privatization of Saudi Telecom -- a transaction of $4.08 billion -- the modern equity market in Saudi Arabia was born (Global Investor, 2009) -- it will nevertheless have to go a long way to meet all the functions of a highly developed equity market.

By 2005 and relative to other equity markets in the region, the equity market of Saudi Arabia was characterized as large, but only limitedly accessible. It was following a trend similar to that of the more developed western societies, and it was striving to align itself to the economic principles of the United States. Yet, advancements were made at a slow rate. There were other countries in the Gulf region which regulated smaller markets, and were as such more flexible. A relevant example is Bahrain (Abraham and Seyyed, 2005).

In 2006, the Saudi Arabian equity market was met with an unprecedented boom, created however on seemingly undesirable conditions. At this stage, the TASI (Tadawul All-Share Index) had decreased by more than SAR 1.96 trillion; this virtually meant that the capitalization of the market suffered drastic reductions. The direct result of this situation was that of the radical devaluation of assets. To investors then, the opportunities to purchase assets enhanced. What these realizations came to was a "buying euphoria" that materialized in "bubble-like tendencies" (Mahmood, 2007).

By 2007, signs of improvement were already obvious. The percentage of the oil revenues in the overall gross domestic product decreased, as the industry diversified and the other non-oil sectors were beginning to register income and attract investors. The risk of investments had significantly decreased, and the country ratings had significantly increased. In all this growth, the equity market was registering an intensifying activity, an enhanced diversification of the shares traded, as well as an increasing number of equity issuers and borrowers.

The direct result was the emergence of the Saudi Arabian equity market as the largest stock market in the Gulf Cooperation Council region, a formation founded in 1981 between Saudi Arabia, the United Arab Emirates, Oman, Qatar, Kuwait and Bahrain, by which the countries lifted their trade barriers, and worked to support each other and to achieve common goals. Returning however to the Saudi Arabian equity market, by 2007, it had come to be the largest such market in the GCC region. With a total value of 1.11 trillion Riyals (SAR), or an estimated $295.75 billion, the equity market of Saudi Arabia accounts for 30% of the entire equity market in the Gulf Cooperation Council (Mahmood, 2007).

In spite of these advances, fact remains that the Saudi Arabian equity market is still an emergent market, found in its rather early stages of development. The number of investors is fairly limited, as is in fact their very access. The number of companies raising funds through equity is also reduced. Then, the interest and participation of Saudi Arabian investors is limited. While it is difficult to second-hand asses the populous reactions to the growing equity market, the data so far presented points to a situation in which the domestic population is yet unwilling to embrace a highly developed equity market. This is best revealed by the reduced interest in trading shares on the part of both Saudi Arabian companies, as well as Saudi Arabian investors.