The International Report Overview

When Saudi Arabia opened up the Saudi Stock Exchange Market to foreign investors, some economists forecast that the flow of foreign investment institutions would be weak in light of the current restrictions. The rules in the opinion of some experts are highly restrictive and not able to attract more investors (Khatoun & Shamma 2015). For example, the maximum foreign ownership of company shares and the strict rules for foreign direct investment licenses, including the asset value managed by eligible

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institutions of five billion dollars and that the foreign investment institutions have no less than five years’ experience of investment. These restrictions have led to criticism from public companies and indices such as the MSCI and Financial Times that are considered very important to many global institutions. This indicates that the Kingdom will need to amend these rules if it wants to join the global institutions (Reuters 2015).

A study by Morgan StanleyCapital International in 2014 found that Saudi Arabia was the least open country in terms of the ability of foreign investors to enter the market. This was in comparison to other emerging markets such as Qatar Stock Exchange Market and; the UAE Stock Exchange Market in the GCC countries, India, China, South Africa and Malaysia (Morgan Stanley 2014 cited in Alkhabeer 2015). According to the Maceen Capital Annual Report (2015), one factors that may pose obstacles to foreign investment institutions and reduce their attraction to the Saudi Stock Exchange Market is the regulations. As an example, the Saudi rules set the top percentage of foreign financial investment institutionsat 20%. The report added that in comparing the region's markets that have been previously included in the index MSCI, regulations in most countries allowed their companies to open foreign ratios based on each company’s system. This is obvious in the Dubai Stock Exchange Market which increased the percentage up to 100% for the Emirates integrated Telecommunications Company or 0% as in the Emirates Investment Bank. In addition, the Qatar stock Exchange has allowed foreign investors to have a maximum 49% in a listed company an increase from 25% previously.

In 2016 the MSCI has reviewed the rules of foreign investment in the Saudi Stock Exchange Market. It noted that although the Saudi regulators have attempted to improve accessibility to the local market, it still monitors the positive evolution of foreign investment flows. It seems that regulation and other reforms in the stock exchange

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market need to change in the future if Saudi Arabia is to join the MSCI and other global institutions. In this report the MSCI did not reveal the reasons behind its judgment in details, but amendments to the Rules for Qualified Foreign Investment institutions planned for the mid of 2017 may bring the Saudi Equity Market closer to the emerging market (MSCI 2016b).

A few days after the MSCI report was released, the Capital Market Authority in Saudi Arabia announced that it intended to review the regulations and others operational matters in order to increase the level of attraction and protection for foreign investors and for Saudi Arabia to be included in the MSCI emerging market index. In respect to this goal, the amendments to modify registry conditions of qualified foreign financial institutions, such as lowering the minimum value of assets under management to SAR 3.75 Billion (equivalent amount $1 billion), rather than SAR 18.75 Billion (equivalent amount $5 billion) and extending foreign institutions to include sovereign wealth funds and university endowments. In addition, the Capital Market Authority and the Saudi Stock Exchange (Tadawul) noted that there is continuous consultation with MSCI to achieve its development goals (CMA 2016m). It is clear that the Capital Market Authority is very interested in including its stock exchange market in the emerging markets as it apparent in the following statement onits official website (CMA 2016m):

The Capital Market Authority recognizes that the inclusion of Saudi Arabia into international indices including MSCI emerging market index, would have a positive effect on the CMA’s strategic objective of further developing the Saudi capital market to create a world class transparent capital market.

However, in May 2014 the MSCI upgraded two stock markets in the gulf region the United Arab Emirates and Qatar Stock Exchange Market to emerging market status which has had positive impact on their Stock Exchange Markets (Salman Al-Sudairi et

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al. 2014). There were significant share price rises on the Qatar and Emirates stock exchanges after their inclusion (Tarbuck & Simpson 2013). These two countries were included in the index because of improvements of many notable aspects such as liberalisation and relaxation of foreign ownership restrictions. The other Gulf countries have not been included in the MSCI and will need to speed up reforms toward liberalization (Tarbuck & Simpson 2013).

The inclusion of the UAEStock Exchange Market and Qatar Stock Exchange Market into the emerging markets index in 2014 reflects the robustness of regulations and operational structures in their stock markets and foreign investment. These countries have the highest percentage of foreign investors in their markets compared to the other markets in the region. Such inclusion implies that improving regulations and registration procedures makes foreign investors more willing to invest in these stock exchange markets. Furthermore, improving regulations to the standard required by the MSCI will attract high quality of foreign investors. Madhi Mattar, CEO at Abu Dhabi- based Finance House Capital, told CNBC after UAEStock Exchange Market and Qatar Stock Exchange Market were included in MSCI (El-Din 2013): "It's not just the amount of the flow that is expected to come here; it's the quality of the flow. You will have more of the long-term, educated investors rather than the hedge funds".

Having been formally included the UAE and the Qatar stock exchange markets in the MSCI emerging markets, statistics on 26 May, 2014 showed that the Abu Dhabi Securities Exchange had risen by 17.7%, while the Dubai Financial Market had surged by 47% and Qatar Securities Exchange had risen 29% (Saidi 2014). The improvements in those markets imply that MSCI classification has expected benefit in increasing the foreign investment flow (Saidi 2014). However, it has been assumed that the main objective behind these regulations is to increase transparency and corporate governance,

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rather than simply to increase the flow of additional funds into the local stockexchange market (Halligan 2015).

In such considering the MSCI report, it is clear that the Saudi rules are very essential to foreign investors and Saudi policymakers must bear in mind that the foreign investors appreciate the MSCI evaluation. Foreign investors trust the MSCI and other organizations as they play a role in increasing foreign investors' ability to tradefreely which reflects positively on local investors, individuals and institutions. Moreover, they participate in devolving legislative and regulatory framework that governs domestic and foreign investments (KAMCO 2011). Therefore there are benefits in using MSCI and other organizations reports to assess how to attract foreign investors and protect shareholders in the current rules.

However, going back to the main discussion about the MSCI classifications, raising the limitation on foreign investment institutions,corporate governance and stock exchange market system were on the top of its agenda (Saidi, Prasad & Naik 2012).In addition to other criteria that were considered such as market capitalization, short selling, custody, and settlement. According to Saidi et al. (2012), other international emerging indexes such as S&P, Dow Jones and Russell mostly have considered these standards in their evaluations. For example, S&P in its 2015 report mentioned that the Saudi stock exchange was still not eligible to be included in its index because of its foreign ownership restrictions. The Capital Market Authority will need to take a big step forward in implementing reforms to develop its market structure, which lead to an increase in foreign investors flow (S&P 2015).

It is equally important to indicate that reclassification may cause a negative effect in terms of falling prices on the stock securities market (Saidi 2014). In this case, it is

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essential for Saudi regulators to work strongly with its regulations that are related to foreign investors, particularly corporate governance, before applying to be included in the emerging market index.

Looking at Australian classification in international review, the MSCI has classified the Australia stock exchange as one of the developed markets such as North America and Western European countries (Saidi, Prasad & Naik 2012). Based on the MACI criteria above, it may indicate that the Australian regulations and its procedures are stronger and better than the Saudi Stock Exchange Rules.