Currently, international investors can only buy into Saudi shares through equity swap arrangements, where a licensed intermediary in the Kingdom holds the stock on their behalf, or a small number of exchange traded funds (ETFs).

Basil Al-Ghalayini, chairman of BMG Financial Group, told Arab News: “Allowing foreigners to trade in Tadawul will broaden the investors platform, especially those institutional investors who are badly needed for the stability of the market.”

There has long been demand from foreigners to have access to the Tadawul bourse. According to Tadawul's statistical report for the first nine months of this year released earlier, total equity market capitalization at the end of the first nine months reached SR1.21 trillion ($323.79 billion), while the total value of shares traded reached SR776.36 billion ($207.03 billion), over the same period of the previous year.

“The possibility of opening Tadawul to foreign investors has been talked about for years and the prospect of doing it is very welcome, especially if it is done in line with the Indian model of privileging institutional investors. For virtually all the exchanges around the world that have taken this step, it has represented an important step toward improved access to capital, enhanced governance, and a stronger role in boosting economic development,” Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said.

The fact that there is a stronger pool of demand for the listed shares in a given country naturally attracts more companies to list. The impressive history of the Warsaw Stock Exchange as one of Europe's most dynamic bourses stands as a good case in point, in spite of the relatively modest size of the Polish economy, he added.

Kotilaine said: “The benefits from opening Tadawul to foreign capital are manifold. Most importantly, as the Kingdom tries to pool capital for its economic diversification, the availability of funds from sophisticated international investors is very welcome. The step should also boost the 'institutionalization' of the Saudi Arabian exchange.”

Tadawul has been historically dominated by retail investors, which has engendered volatility and often defied a clear link to economic fundamentals. Although Saudi Arabia has important institutional investors in the shape of the pension funds, family offices, and some government funds, as well as — increasingly — insurance companies, the relative weight of these sophisticated investors has historically been very modest. Enabling or encouraging the participation of foreign institutions will mean that more market participants will base their decisions on a careful analysis of the fundamentals.

In many other countries, he said, the arrival of foreign investors has caused retail investors to start paying greater attention to their decisions. The end result should be a market that is, other things equal, more stable and linked to fundamental analysis. The presence of foreign investors should also result in greater investment in research and analysis, thereby further contributing to this virtuous cycle. Furthermore, the presence of large foreign players should contribute to improved governance and transparency standards as many of these institutions will demand the same standards from the companies they invest in as they would at home, Kotilaine said.

A great deal of anxiety in many markets has been linked to the potential instability caused by hot money inflows. Saudi Arabia has an opportunity to contain such fears by initially controlling the way in which foreign investors access the market. More importantly, however, the Kingdom is supported by a high degree of macroeconomic stability and transparent policy making, which should give investors comfort. “Opening access to foreign capital should give Tadawul a welcome boost, given the attractive growth prospects of the economy. However, the positive progress may well — and arguably should — prove more gradual,” Kotilaine said.