LONDON, 22 June 2006 — Saudi Arabia is to introduce new corporate governance regulations by the end of this year, and the Kingdom is also in the process of drafting regulations which would facilitate the issuance of Sukuk (Islamic bonds), confirmed Turki Ibrahim Almalik, head of Authorization and Inspection at the Capital Market Authority (CMA).
Almalik, who was in London for the Saudi Invest conference, confirmed to Arab News that “the draft law on corporate governance for financial institutions is still under evaluation. We are going through the final phase and should be passed by the end of the year. We are currently also working on regulations which would allow for Sukuk to be issued in the Kingdom. In fact, we are working on the issuance of a corporate Sukuk soon.”
Asked why the Kingdom was lagging behind Dubai in leveraging the issuance of Sukuk, especially in a liquidity rich market, he said that there were many technical issues to be considered and resolved. The CMA, he added, does not intend to draft parallel regulations for an Islamic capital market (ICM) but these regulations would come under a comprehensive capital market regulatory and legal framework.
The sustainability and prospects for the future development of the Saudi capital market are good. This stressed Said Al-Shaikh, chief economist at National Commercial Bank, is underlined by the robust activity in IPOs (initial public offerings) and rights issues; the promising equity and debt market both Sukuk and conventional bonds); the growing prospect for securitization of trade finance and commercial paper; and the emergence of cross-border acquisitions and mergers to reflect growing GCC integration.
However, these are tempered by the challenges faced by the Saudi capital market — rapidly changing marketplace; the need for more enforceable information disclosure by listed companies; fair valuation of new issues; introduction of world-class regulatory standards; the strengthening of corporate governance; and the cross-listing of stocks on regional stock exchanges.
Last year there were 1,5370 IPOs floated globally totaling $167 billion, of which the Middle East accounted for only 36 or $7.6 billion. Of this the UAE accounted for $1.9 billion and Saudi Arabia for $1.67 billion.
The general consensus is that the recent stock market correction, which saw half of the value of the Tadawul wiped off in March 2006, has had no impact on GDP growth which continues in its high teens. According to Brad Bourland, Chief Economist of SAMBA Financial Group, there will be “very prosperous times ahead for Saudi Arabia for the next few years.” If the price of oil stabilizes to an average of say $50 per barrel for the next 40 years, the Kingdom’s revenues alone would be in the region of $13 trillion; that of the GCC at $24 trillion; and the Arab members of OPEC at $38.5 trillion.
The Saudi economy has come a long way in just one year. Such is the rapid pace of change. Saudi Aramco, for instance, has announced that it will be spending $133 billion in the next four years (2006-2010). The projected magnitude of the capital flows in the Saudi economy over the next few years is “mind-boggling” according to many of the bankers. Some of the funds are being channeled into setting up eight special economic zones over the next few years in key parts of the country, although some foreign bankers want greater clarity on what these zones are.
However, there are many challenges for the Saudi economy. Unemployment is a major challenge, given that 56 percent of the Saudi population is under 20 years old. Adult male unemployment for the age group 22-24 is 28 percent, according to SAMBA. On the flipside, the Saudi economy lacks a depth of qualified people especially in financial services and key other industries.
There is also natural pressure on the Saudi riyal, which was pegged to the US dollar in 1986 and which still shadows the greenback. Bankers stressed that the peg will remain, but the Saudi riyal is undervalued by about 15 percent. There is pressure on Riyadh from the International Monetary Fund (IMF) to revalue the riyal upward by 15 percent against a weak US dollar.
With the Saudi capital market expected to maintain is buoyancy, perhaps from a consumer and investor perspective, the biggest challenge is investor education and awareness to ensure that they understand the risks of investing in the stock market.