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Aramco IPO, market transparency among key tests for new Saudi exchange boss

The new chairperson of the Riyadh Stock Exchange faces a number of challenges, including the exchange's own demutualization and reforms needed to prepare for its part in the coming IPO of Saudi Aramco. However, one of the biggest might be proving that her own appointment marks the beginning of a real effort to open up Saudi Arabia's market and make it more transparent.

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Institutional investment on the Riyadh Stock Exchange, or Tadawul, is low and trading is dominated by retail traders.

Source: Associated Press

Sarah Al Suhaimi, who became the first woman CEO of a Saudi bank in 2014 when she was appointed to head up NCB Capital, the investment banking arm of National Commercial Bank, will now also become the first woman to head a major Saudi institution. Al Suhaimi is emerging as one of the faces of the country's international marketing efforts. She was on the slate of meetings, along with government ministers and King Salman, lined up for the visit to Saudi Arabia by British Prime Minister Theresa May on April 4 and 5.

The IPO and the overall growth of the exchange are crucial planks in the National Transformation Program, which aims to triple Saudi Arabia's non-oil income. Citibank's projections suggest, with consumption outpacing production, Saudi Arabia may become an oil importer at some point between 2030 and 2038.

With the Riyadh Stock Exchange poised to share, with at least one other exchange, the Aramco listing in early 2018, her appointment is an important signal of Saudi Arabia's efforts to liberalize its capital markets, said Patrick Blewer, a consultant at Peninsula Petroleum in London, who has advised state-owned natural resource companies on capital markets strategy.

The Riyadh Stock Exchange declined to comment when approached by S&P Global Market Intelligence on this story.

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The new chairperson of the exchange, Sarah Al Suhaimi, who is also CEO of the investment banking arm of National Commercial Bank.

Source: National Commercial Bank

Deputy Crown Prince Mohammed bin Salman, who oversees Saudi Arabia's attempts to diversify away from oil as well as the Aramco IPO, has put Saudi Aramco's value at $2 trillion, although energy analysts have priced it at more modest levels, between $1 trillion and $1.5 trillion. Before the Saudi government announced it would cut Aramco's tax bill, Edinburgh-based energy research and consultancy firm Wood Mackenzie valued it at only $400 billion, reflecting market uncertainty about the country's oil reserves.

"Saudi Arabia's development plan, including the Aramco issuance, will face some snags and likely underwhelm in terms of capital," said Rachel Ziemba, head of emerging markets coverage for London-based Roubini Global Economics. "The other important question for the exchange is whether domestic demand is really picking up," she said.

Punching below its weight

The Riyadh bourse, known in Arabic as the Tadawul, is also in need of reform, some observers said.

"There are some long term issues which I think continue to cause the exchange to punch below its weight," said Roger Carroll, a former Downing Street speechwriter who was head of communication for the Riyadh Stock Exchange for several years. One of the reasons for this, he said, was that staff is appointed "disproportionately" on the basis tribal and regional background.

Although Saudi Arabia's stock exchange aims "quite successfully" to be a technological leader, said Carroll, unexpected policy changes are an issue for companies contemplating a listing on the exchange.

"What looks good today may be modified tomorrow."

Carroll cited the fate of the Capital Market Authority as an example of the Kingdom's unpredictability. Founded in 2003, it was "very well constructed and initially very well run as a competent, independent regulator."

However, listed companies lobbied for special treatment from the regulator and blamed the CMA when their share prices fell. When Jammaz Al Suhaimi, the head of the CMA, was fired in May 2006, it prompted the departure of several good staff members, according to Carroll who worked at the stock exchange at the time.

Jammaz Al Suhaimi, a former central bank deputy governor known as a reformer, is the father of the newly appointed stock exchange chairperson.

Sarah Al Suhaimi's pedigree, as much as her gender, might be part of a commitment by Saudi Arabia to creating a market-based economy plugged into international liquidity streams, said Blewer. "[Or it] might just be a PR platform."

"If they hire the right people and fund it [the stock exchange], they might end up genuinely creating the necessary structure," Blewer said, "Basically, shove enough cash and goodwill at something and it might actually happen."

Established in 1984, the stock exchange was incorporated as a company in 2007, with a board of representatives from the finance and commerce ministries, the central bank, four brokerage companies and two listed companies.

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Deputy Crown Prince Mohammed bin Salman oversees the Saudi Aramco IPO.

Source: Associated Press

Institutional investment is low, even by Arab capital market standards, and short-term retail traders account for 80% of the turnover on the market.

In 2015, then-CEO Adel Al Ghamdi opened trading to foreign investors with $5 billion in AUM and five years' experience. In May 2016, to fend off concerns the stock exchange could have trouble absorbing Saudi Aramco's listing without an infusion of foreign capital, the CMA lowered this threshold to $1 billion and gave investors two working days to settle trades. This helped foreign investors without large amounts of money on hand.

The CMA also announced it would approve securities lending and covered short-selling, allowing hedging against downturns.

In December 2016, the CMA approved a Parallel Market, letting smaller businesses list without meeting the more stringent requirements of the main market.

Despite these reforms, foreign investment accounts for less than 1% of the $408 billion market, according to the exchange. Inefficient companies and higher growth rates on offer elsewhere have drawn foreign investment to other emerging markets instead.

Key goals

A key goal awaiting Al Suhaimi will be securing the bourse's inclusion in the MSCI Emerging Markets Index — on which many global funds base their investments — if it can meet the index's rules on market accessibility.

A second will be guiding through its plans to demutualize and list in 2018. A listing would, in turn, require it to be more open about its finances and operations.

One risk, according to Blewer, is that the Tadawul might style itself on a large exchange like the LSE, only for all the shareholders to be the big Saudi conglomerates and the sovereign itself.