Mideast un­der­sea ca­ble at heart of se­cu­rity scare

Arab News - - BUSINESS - FRANK KANE | SPE­CIAL TO ARAB NEWS

SAUDI Ara­bia went to New York in a bid to woo Amer­i­can in­vestors to its am­bi­tious plans to trans­form the King­dom’s econ­omy away from oil de­pen­dency, but it was London that stole the show with a shrewdly timed an­nounce­ment and a fly­ing visit by the head of the London Stock Ex­change.

Crown Prince Mo­hammed bin Sal­man met Mark Make­peace, head of the LSE, as the ex­change’s in­dex com­piler FTSE Rus­sell an­nounced it had given ap­proval for the Riyadh stock ex­change, the Tadawul, to be granted emerg­ing mar­ket sta­tus from early next year.

The move puts Saudi Ara­bia in a se­lect club of mar­kets that in­cludes China, Rus­sia and In­dia, and will ce­ment its po­si­tion as the lead­ing stock mar­ket in the Mid­dle East. The King­dom will com­prise 2.7 per­cent of the in­dex, which is part of FTSE Rus­sell’s global emerg­ing mar­kets in­dices.

It was given “sec­ondary” mar­ket sta­tus, but — with the pace of fi­nan­cial mar­ket re­form ac­cel­er­at­ing in the King­dom — it is only a mat­ter of time be­fore “ad­vanced” sta­tus is ac­corded to Tadawul, once cer­tain other reg­u­la­tions have been put in place. Tadawul has moved at such speed in the past two years that this is un­likely to take long.

The move will mean an in­stant uptick of around $5 bil­lion (SR18.75 bil­lion) from pas­sive funds seek­ing to in­vest in the King­dom’s Vi­sion 2030 trans­for­ma­tion. Most of the world’s big pen­sion funds, un­til now pre­vented by their own reg­u­la­tions, will be able to en­trust pen­sion­ers’, wid­ows’ and or­phans’ funds into Saudi Ara­bian se­cu­ri­ties. It is a huge shift in global in­vestor sen­ti­ment.

The im­pli­ca­tions for re­gional cap­i­tal mar­kets are also pro­found. At a cap­i­tal­iza­tion of $500 bil­lion, the Riyadh ex­change is al­ready the largest in the Mid­dle East, and the move an­nounced in New York will en­trench that po­si­tion. Tadawul au­thor­i­ties have al­ready in­di­cated they want to make it the “dom­i­nant” ex­change in the Ara­bian Gulf, and this will hap­pen faster now.

Dis­cus­sions with other re­gional ex­changes, es­pe­cially in Bahrain and the UAE, on fur­ther reg­u­la­tory co­op­er­a­tion and pos­si­ble dual list­ings of stocks are likely to pick up ur­gency.

When the other big in­dex com­piler MSCI admits Riyadh to its own emerg­ing mar­kets in­dex in June — which has been widely flagged and now must be a for­mal­ity — it will com­plete the trans­for­ma­tion of Riyadh’s fi­nan­cial mar­kets. Once big but closed, they will now be even big­ger and open to for­eign in­vest­ment on a scale that would have been un­think­able just a few years ago.

Those for­eign in­vestors will be able to take part in the big­gest pri­va­ti­za­tion pro­gram in his­tory, with as much as $300 bil­lion of as­sets set to be sold off by the gov­ern­ment. A large por­tion of this will be in the from of ini­tial pub­lic of­fer­ings (IPOs) on the stock ex­change. For­eign­ers will be able to buy into Saudi Ara­bia’s en­ergy in­fra­struc­ture, schools and hos­pi­tals, boom­ing en­ter­tain­ment and tourism busi­ness, and even its foot­ball clubs.

They will also be able to take part di­rectly and more eas­ily in the “big one” — the IPO of Saudi Aramco, val­ued at $2 tril­lion. This will def­i­nitely take place on the Tadawul, in ad­di­tion to for­eign ex­changes be­ing con­sid­ered. Aramco ex­ec­u­tives are in­sis­tent it is on track to hap­pen later this year.

With the new clas­si­fi­ca­tion, Aramco on Tadawul can at­tract se­ri­ous in­sti­tu­tional in­vest­ment from abroad — per­haps not enough to take on the whole of the $100 bil­lion val­u­a­tion a 5 per­cent IPO would in­volve, but a big­ger chunk of it than be­fore. Fears that the Saudi mar­ket might be swamped by Aramco shares would be as­suaged if the big­gest pen­sion funds in the world are also par­tic­i­pat­ing in Riyadh.

The more in­ter­est­ing ques­tion is whether the FTSE coup in New York makes it more likely that Aramco will chose London as the venue for the in­ter­na­tional part of the trans­ac­tion.

Cer­tainly the tim­ing was cheeky on London’s part. The Saudis had spent all week in the city meet­ing Amer­i­can in­vestors, and must have also had meet­ings with the New York Stock Ex­change and Nas­daq. There were plenty of US fi­nan­cial in­sti­tu­tions rep­re­sented at the Saudi-US CEO Fo­rum the day be­fore the FTSE an­nounce­ment.

It must have been galling for those ea­ger in­sti­tu­tions that a Man­hat­tan judge chose the same day as the FTSE an­nounce­ment to rule that law suits un­der the Jus­tice Against Spon­sors of Ter­ror­ism Act ( Jasta) could pro­ceed, re­ject­ing Saudi claims the cases should be dis­missed.

This is one of the things Aramco ad­vis­ers had said was act­ing against New York’s ef­forts to win the for­eign part of the IPO. But the Amer­i­can jus­tice sys­tem is long and con­vo­luted, and that par­tic­u­lar rul­ing will be chal­lenged again, with the help of the finest le­gal ex­perts money can buy.

The choice of venue still has to be de­cided, but the FTSE coup has made Saudi Ara­bia, and Aramco, em­i­nently more in­vestible propo­si­tions.

Frank Kane is an award-win­ning busi­ness jour­nal­ist based in Dubai. He can be reached on Twit­ter @frankkane­dubai

Rus­sian Pres­i­dent Vladimir Putin at­tends a cer­e­mony for Rus­sia’s Navy Day in Saint Peters­burg. Wash­ing­ton is wor­ried about the pres­ence of the Rus­sian navy around key un­der­sea ca­ble sites. (AFP )

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