Everything you missed from the first day of the Saudi Capital Market Forum: The Tadawul has been growing steadily over the past several years and is poised to continue on this growth trajectory, partially thanks to derivatives, officials and capital markets leaders said yesterday. Other key takeaways from yesterday’s fireside chats and 1:1 sessions include expectations for standardized ESG reporting, a fresh debt issuance from Aramco, and continued VC interest in fintechs. You can also watch the entire day of discussions, if you’re so inclined (runtime: 8:08:04).

A PROMISING EQUITY MARKET

Saudi Arabia currently stands as the sixth largest constituent in the MSCI Emerging Markets Index, said Managing Director of the Financial Markets Advisory at BlackRock, Kashif Riaz, adding that the Kingdom is on its way to becoming the fifth largest constituent, tailing closely behind China, India, Taiwan and Korea.

Getting to know you:Investors are currently in a period of getting themselves acquainted with the Saudi market and available investment portfolios, paving the way for the Kingdom to attract even more foreign portfolio inflows, Riaz said.

A healthy IPO pipeline for the year: CMA Chairman Mohammed Al Kuwaiz expects to see a 30% y-o-y increase in IPOs for 2024 across both Tadawul's primary market and its parallel exchange Nomu, with 56 initial offerings currently in the pipeline. The ICT sector was the primary growth driver in the capital market in 2023, both in terms of the number of listings and the amount of raised capital, he added.

Tadawul attracted 70x more qualified foreign investors in the last three years, coming up to 3.7k by the end of last year, up from 50 in 2017, said Tadawul CEO Mohammed Al Rumaih. The local exchange also saw 120 listings in the past three years and enabled financing totaling more than USD 100 bn, he added.

“Saudi Arabia, and the Tadawul group got the fundamentals absolutely right,” remarkedJP Morgan’s Global Co-Head of Market Infrastructure Jeremy Capstick, praising the local mixture of a growing economy, local top-tier companies looking for capital for expansion, and the effective approaches taken by the relevant bodies to connect the issuers with potential investors.

Market capitalization hit USD 3 tn by the end of last year, up from USD 450 by end of 2015, making Tadawul the 11th largest stock market in the world, according to the world federation of exchanges, up 10 positions from 2015, Al-Kuwaiz added.

Better company structuring and higher profitability have contributed to growth in Tadawul’s average IPO size to USD 450 mn over the past eight years, up from USD 367 mn in the eight years prior to the National Transformation Program, ANB Capital CEO Khalid Al Ghamdi said. Excluding Aramco, companies have raised a total of USD 21 bn over the same period, he added.

Secondary offerings are on the rise: Some 85% of proceeds from IPOs between 2016 and 2023 were pocketed by shareholders, while the rest was used to fuel growth. Meanwhile, proceeds from the eight years prior to that were evenly spent on growth and cashing out shareholders, said AlGhamdi.

Pundits think that proceeds from Nomu listing should be used to fuel growth rather than cash out shareholders: Al Ghamdi expressed concern that 77% of the funds raised on Nomu were spent on cashouts to shareholders, while the remaining proceeds were reinjected back into the issuers.“Ideally, proceeds should be used for expanding business lines, creating jobs, and developing infrastructure.”

POTENTIAL BOOSTERS FOR THE FINANCIAL MARKET

A clear yield curve for sovereign issuances: “The government has worked over the last five years to make sure that there is a very clear yield curve [ for its sovereign issuances] over one year, three years, five years, and 10 years, and beyond that, to 50 years, because it is the benchmark,” Al Jadaan added.

The affordability of advisory services, along with reasonable fees for investors and issuers set by regulatory bodies such as CMA are key for promoting activity in the financial market, said Finance Minister Mohammed Al Jadaan.

DERIVATIVES

The Kingdom's largest lender, Saudi National Bank (SNB), was the latest to debut single stock options (SSOs) on its stocks on Sunday,allowing investors to trade in these contracts for hedging against potential losses or speculate on the stock’s price movement to make gains, said Muqassa CEO Wael AlHazzani. SSOs were introduced as the third derivative instrument on the Saudi stock exchange in November 2023 to trade on the stocks of four of the largest most liquid companies including Sabic, Al Rajhi Bank, Aramco, and STC.

Three new derivatives market participants: These are reportedly Al Rajhi Capital, Alkhabeer Capital, and Aljazira Capital which could start brokerage services later this year, according to a statement seen by Arab News.

VC ♥️ FINTECH

Strong investor appetite for fintech: Al Kuwaiz also highlighted the growing prominence of the fintech sector, saying that it’s the largest recipient of venture capital funding.

The number of fintech players in the local market rose 15x to 147 in 2022, up from just 10 in 2018, said Philip Drury, Global head of technology and communication banking at Citigroup. It’s expected that 70% of payments in the Kingdom will be noncash by 2025, Drury added.

ESG IS GAINING STEAM

Standardization is coming to ESG reporting: The tally of companies engaging in sustainability reporting doubled last year to 30, said Al Kuwaiz, adding that there’s growing investor demand for local companies to establish a standardized ESG template. Manar el Mounif, Neom’s investment chief, emphasized the profitability surge linked to ESG compliance, saying that “implementing energy-efficient infrastructure can yield significant OPEX savings, ranging from 15% to 20%.”

MACRO MILESTONES

The economy expanded to SAR 4 tn up from SAR 2.6 tn in 2016, nudging the Kingdom up the G20 ladder as the group’s 16th largest economy, Investment Minister Khalid Al Falih said. FDI grew 52% during the same time frame, he added.

FDI accounted for 3% of GDP in 2023, up from 1% the year prior, Al Falih said, adding that policymakers are currently aiming for an ambitious 4%.

“If you look at the non-oil GDP, it is growing at a very healthy 4%. We are expecting5% plus in the medium term,” said Al Jadaan.

Economic reforms helped the Kingdom cushion external shocks, including the pandemicand geopolitical risks, Al Jadaan said. “We transform socially. We transform economically. We transformed fiscal policy, where we brought all the budget deficits down from 15% to 2% or even less than that. That is how a country becomes more resilient and deals with these shocks,” he said,

ARAMCO EYES LONG-TERM BOND ISSUANCES

Aramco could tap debt markets this year to issue bonds with longer maturities, ranging from 15-50 years, as part of its strategy to enhance its capital structure, said Chief Financial Officer Ziad Al Murshed.

WATCH OUT FOR THE ROLLOUT OF NETTING REGULATIONS

The Saudi Central Bank is working to introduce netting regulations in a bid to improve financial stability and boost the resilience of the financial sector, said SAMA’s Deputy Governor for Financial Innovation Yazeed Al-Nafjan, adding that the new netting framework would be aligned with international best practice “These regulations aim to enhance the stability and resilience of the financial sector.” The framework would enable banks from reducing and hedging against credit, operational and liquidity risks, Al Nafjan added.

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