Interview with H.E. Dr. Mohammed bin Abdullah Elkuwaiz, Chairman of Capital Market Authority of the Kingdom of Saudi Arabia

01 Jun Interview with H.E. Dr. Mohammed bin Abdullah Elkuwaiz, Chairman of Capital Market Authority of the Kingdom of Saudi Arabia

Q: Saudi Arabia remains an emerging Capital Market in spite of the substantial growth and improvement in recent years. Could you give us a snapshot of the Saudi Capital market today, perhaps focusing on the primary and secondary markets? Comparatively, what is the importance of the money market, the bond market, the ownership market and the derivatives market?

H.E. Dr. Mohammed bin Abdullah Elkuwaiz: If we take a step back and look at Vision 2030, it came out around 2016 and at its core it was really about trying to diversify the kingdom’s economic activities and income sources based on our historic reliance on hydrocarbons. When you decide to take this journey through diversification, you really need to focus on areas where you have a competitive advantage. If you look at Saudi Arabia’s potential sources for competitive advantages for the country, aside from hydrocarbons, one that stands out is tourism, particularly religious tourism. That is why it is no surprise that the country has invested heavily in the past four or five years in opening up the tourism market and building tourism infrastructure. Very high up on that same list of competitive advantages, you will find the country’s financial sector, in both the size of the sector and particularly our area the capital market, the liquidity of the market, the diversity of the investor classes, and our ability to raise capital, causing a reduction in the cost of capital. All of these provide a significant competitive advantage. 

Historically, the sector has been profoundly underutilized and underappreciated mainly because it was not viewed as an economic sector, but rather as a public utility. When you think of something in that way you think of it as being for the sole consumption of the investors and companies limited to your geographic region. No matter how big any sector is, if you confine it to your geographic jurisdiction its potential for growth, its impact,  and its sophistication for development will always be limited. The real change that has happened in the last few years has been removing these constraints on the Saudi capital market. This has contributed to the shift from it being a public utility to a real vibrant economic sector both for the benefit of Saudi Arabia as well as for the broader region. If we look at this in tandem with the equity market, which is the biggest market, this involved opening up to international investors, increasing the numbers of listings, increasing diversity in terms of the profiles of companies, and today in only four years, we have become the seventh largest capital market in the world by market cap. That has been significant progress.

The same is true, albeit at a slightly earlier stage, if we look at the debt capital market. We have now started to develop it from almost nothing four or five years ago into a market that represents roughly 30 percent of the GDP. While that market is still largely government securities, the fastest growth is in private sector issuances which gives us a lot of optimism that we are now moving very rapidly in the last four years to build this second pillar.

Additionally, very soon, in fact, we have already started, is the third wave of capital market development which is the derivatives market. As I said, that already started only last year with the launch on the exchange of index futures, the inaugural derivative product, which should grow even more over the next year or so with more diversity of products. Then last, but certainly not least, underlying equities, debt, and derivatives, you have the asset management industry, that is the professional management industry. Already last year we reached record numbers in terms of the size of the industry with close to SAR750 billion of assets under management and also in terms of the number of participants, which for the first time exceeded half a million people. It looks increasingly like the country’s capital market is firing on all cylinders both for the benefit of Saudi but also for the broader region. 

Q: One of the first achievements of the CMA was the MSCI upgrade of Saudi Arabia from a “Standalone Market” to “Emerging Market” in June 2018. Saudi stocks were phased into the index in two tranches with a 50 percent inclusion factor for each, with the implementation of the first tranche taking place on May 28 and the second on August 28, 2019. What was the initial impact on the market?

H.E. Dr. Mohammed bin Abdullah Elkuwaiz: I would say generally quite significant. As we discussed, Saudi Arabia was effectively closed off to international investors, and this obviously had to change as we increase our aspiration level for the market. The first step was to open the market to foreign investors and the second stage was to be added to most global indices which is essentially the validation which allows foreign investors to come in. Since those two milestones happened, ending in 2019, we have seen over SAR170 billion of net investor flows coming into the country, which saw foreign investment grow from less than five percent in the stock market to now closer to roughly fifteen percent of free float. Effectively, foreign investor ownership has almost tripled.

What is most interesting in this exercise is that the opening up of the Saudi market to international investors coincided with COVID. The pandemic was a very interesting experience for us because it was the first real significant market fluctuation with foreign investors. There was always a concern on whether foreign investment participation would create stability or volatility for the market. We were actually pleasantly surprised in the sense that during COVID, the foreign investor inflows continued unencumbered for every month throughout COVID which meant that foreign investors ultimately became a stabilizing force for the capital market. In fact, this helped the Saudi market and the issuers better tackle the global pandemic. We were fortunate to have opened up the market at the right time.

Q: The CMA had a target to reach up to 85 percent of the size of Saudi Arabia’s economy. You recently stated that the Authority exceeded its goal, reaching over 90 percent of the size of the Saudi economy. A record number of 30 companies have applied for listing in the market in 2021. Could you tell us more? 

H.E. Dr. Mohammed bin Abdullah Elkuwaiz: When we designed the plan and the strategies for the capital market, one important factor that we looked at was the proportion of market cap to GDP. In other words, how big is your capital market in relation to the size of your economy. The reason we chose this metric among many others that we targeted is that there is a lot of evidence that correlates economic development and maturity with the size of your capital market to the size of your economy. The bigger the capital market in proportion to your economy, the more the capital market becomes an efficient vehicle to drive economic growth. Indeed we had a goal to be higher than 80 percent in terms of market cap to GDP.

As a matter of fact, particularly given the recent run and bull market, the capital market is today in excess of 100 percent of the size of the economy. It is almost 109 percent the size of the economy. This is obviously determined by various factors, including economic activity and earnings of companies. Post-COVID companies have improved their earnings quite a bit which is driving the valuation market, but this was also driven by the significant increase in the number of listings that we have seen particularly after COVID. For example, in 2021, we had 21 listings which is the largest number of listings in the market’s history in any one year. So far, this year, it looks like the numbers are even bigger. In the first quarter of 2022 we had eighteen listings, so if the pace continues, 2022 is likely to be much bigger.

Q: Compared to the same quarter of the previous year, The Capital Market Institutions recorded a growth rate in their net income by 64.8 percent. What is the outlook in 2022?

H.E. Dr. Mohammed bin Abdullah Elkuwaiz: Just as the capital market reflects the economy, the profitability of capital market institutions is a reflection of the market. As we are now seeing a significant growth and an increasing level of activity across all areas of the market whether it is in trading, asset management, offering, listing, or what have you, we are seeing a corresponding growth in the revenue and profitability of firms that operate in the sector. Only last year we saw over a 40 percent increase in terms of the net profit of the sector.

What is equally interesting is that in addition to the growth we are seeing more diversity in terms of the composition of that income. In the past, most of the earnings from capital market institutions came from brokerage and dealing activities, buying and selling shares in the stock market. Today we are seeing the fastest growth come from asset management. As of last year, asset management is almost equal to brokerage in terms of the level of activity. This tells us that not only is the market growing, but it is also diversifying in terms of sources of revenue.

Q: You are a key figure appointed to develop the Saudi capital market under the kingdom’s Vision 2030 diversification plan. Since chairing the Saudi Capital Market Authority (CMA) from July 2017, you have set several ambitious goals, and from what we know, achieved some important results. Among your goals were the implementation of changes to stock exchange rules allowing more flexible trading, the reduction of the minimum value of assets under management needed for a foreign institution to qualify as an investor, and others. Your ultimate goal is to make the kingdom a more attractive location for foreign investors and help Saudi Arabia become an international capital markets hub. What is the roadmap and what final message would you give to the readers of Newsweek?

H.E. Dr. Mohammed bin Abdullah Elkuwaiz: I would say the roadmap starts with an aspiration. We started this journey wanting the capital market to become the main market for our region, to move from a large but ultimately local market to becoming the main market for the entire region, and hopefully, one of the most important markets in the world by 2030.

Now that we are four years in, we have already accomplished some of it. We already discussed market size, and there we are already in the top 10 in the world by market cap. Being one of the largest markets in the world however is not the same as being one of the world’s most important markets. Our goal now is to become one of the most important global markets. That will come from more diversity of products. There is a significant focus on the debt capital market and I expect we will see a great culmination of this in the coming years. We are likely to see a lot more growth in the derivatives market and ultimately, this is to serve, not just Saudi Arabia, but as we become the main market for the entire Middle East region, this will ultimately benefit all the countries in the Middle East. They will have lower cost of capital, more liquidity, and more ability to raise financing which is a requirement for everyone.