CMA caps money market funds’ offshore investments at 5%

Saudi money market funds are about to become a much bigger buyer of local short-term paper. The Capital Market Authority’s (CMA) new 5% cap on offshore holdings will redirect a larger share of fund liquidity inward, lifting demand for deposits, murabaha, sukuk, and short-term debt instruments and deepening the domestic money market, writer and analyst Jihad Alobaid tells us.

REFRESHER- Public money market funds may hold no more than 5% of net assets outside the Kingdom, according to recent CMA rules (pdf). Managers have two years to bring existing portfolios into line, and funds with offshore exposure above 20% must get below that threshold within six months. All offshore investments must also be with counterparties holding an investment-grade rating from a licensed agency, again with a two-year compliance window.

Can the local market absorb it? Alobaid thinks so. “The Kingdom has a large banking base and an expanding debt market, so there is good capacity to absorb this liquidity,” he said, with the two-year correction period allowing a gradual redistribution “instead of a sudden shift that could cause an imbalance between supply and demand.” The transition also lets managers restructure against maturity dates rather than dump holdings, Tam Capital senior investment manager Abdulrahman Al Oyoni says on LinkedIn.

The squeeze is on fund managers: The harder task will be “maintaining the balance between return, diversification, and risk management, because shrinking the external investment space means a larger share of the portfolio is concentrated in the local market,” Alobaid says. Funds will need to spread exposure across more banks, counterparties, instruments, and maturities, with tighter control of reinvestment timing.

The supply side may follow the demand: The rule could act as an incentive to develop and issue more local short-term instruments, adding depth to the Saudi money and debt market over the medium term, Alobaid says.

The bigger picture: The requirements come a month into Mazen Al Sudairi’s tenure as CMA board chairman, with the market contending with declining liquidity and regional geopolitical pressure. Days after his appointment, Morgan Stanley projected the foreign ownership cap could rise to 75%, drawing around USD 4.3 bn in additional inflows, or USD 7.4 bn if restrictions are lifted entirely.