“It’s not often that you get to be the exchange and the market that hosts the largest IPO in history,” said Mohammed El Kuwaiz, chairman of the Capital Market Authority, the regulator for Saudi markets, in January. “We’re looking forward to Aramco to put us on the map.”
Last month, Saudi Arabia got a nod it is heading in the right direction, receiving approval to join the benchmark FTSE Emerging Markets index, a step expected to push billions in new international
capital onto the Tadawul as money managers and passive investors who track those indexes invest accordingly.
Still, there are doubters. “I don’t think the Saudi local market can float a $100 billion IPO,” said Babatunde Ojo, an analyst and frontier- and emerging-markets portfolio manager at Harding Loevner, referring to the amount the kingdom has said it hopes to raise in an Aramco IPO.
But Mr Ojo also called the FTSE inclusion a “stamp of approval that Saudi is open for business” and that “international
investors should have no problem investing in Saudi.”
Now that Saudi Arabia has landed a spot on the FTSE index, the kingdom is waiting to see whether it will also gain admission to the benchmark emerging-market index run by MSCI , which would bring tens of billions of dollars onto the exchange as many fund managers use the MSCI index as a guide for where to place investors’ funds. Senior kingdom officials expect they will get the nod for admission in June.
“A lot of index providers also said they’ve not seen a country deregulate and create changes and modifications and improvements in their capital market as Saudi has in the past two years,” Mr El Kuwaiz said.
The Tadawul fortifying itself is now imperative, considering it may wind up being the only exchange to list Aramco. When the listing was first announced in 2016, Prince Mohammed told advisers he was most interested in floating it on the New York Stock Exchange, according to sources familiar with the potential listing. He and senior kingdom officials touted the possibilities of massive international investment.
But potential legal and regulatory hurdles of an international Aramco IPO have become more complicated than initially expected, leading kingdom officials to look more carefully at a domestic-only listing.
The Tadawul was closed to foreign investors until 2015, but it has registered 130 international financial institutions since then. Still, international investors account for roughly 5 per cent of the overall ownership of stocks listed on the exchange, even as regulators have made it easier for international investors to trade there.
The Tadawul’s changes include settling trades within two days and having numerous agents, known as custodians, to execute trades. It has lowered the minimum assets under management required to invest there, allowed investors to bet against the market by shorting stocks and pushed back limits on foreign investments in Saudi stocks.
Still, even with upgrades, advisers worry the Tadawul could be overwhelmed by an Aramco listing, and they question whether its technology and internal controls are sophisticated enough to handle the mammoth influx of trading the listing would bring.
Some people familiar with the process said the Tadawul is likely to have further technological upgrades in place by year-end, should Aramco seek to list by then.
The Saudi economy remains heavily dependent on oil, which accounts for 74 per cent of its total exports and contributes 63 per cent of budget revenues, according to UBS Wealth Management. But energy stocks are a fraction of Saudi Arabia’s stock market, accounting for just 2.3 per cent of value traded on the Tadawul. Materials and banks dominate the exchange at 30 per cent and 27 per cent, respectively, as of April 1.
Aramco listing on the Tadawul would change the face of the exchange—roughly one-third of the index would be dominated by a single oil company, increasing the chances Saudi stocks would move in tandem with oil prices while Prince Mohammed has been trying to diversify the Saudi economy away from oil.
Khalid al-Hussan, the Tadawul’s chief executive, said in a March interview that they have a pipeline of companies
from non-oil industries listing on their exchange or potentially cross-listing on their exchange, which they expect will mitigate the likelihood that the Saudi market moves in relation to oil prices.
Investors are betting an Aramco IPO would raise funds to aid the government’s economic diversification efforts and improve the outlook for everything from banks to insurance companies
to education providers.
With Saudi officials now looking more carefully at a domestic-only listing, they have touted how Saudis could take money they have invested overseas and instead put it into Aramco stock.
“A listing of the size and scale of Saudi Aramco is an opportunity for [Saudi citizens] to repatriate some of that capital and bring it back to invest in a significant investment opportunity,” Mr El Kuwaiz said.