Reuters/Hamad I Mohammed
Aim to be global finance centre
Infrastructure not in place
Sector fighting for investment
Saudi Arabia wants to emulate London or Hong Kong in the international money markets and become a global financial centre, Saudi investment minister Khalid Al-Falih said at a capital markets conference in Riyadh in February.
“We need to channel global capital,” he said. “We want to become a regional financial hub.”
But judging by the half-built nature of the King Abdullah Financial District (KAFD) in Riyadh, where the minister was speaking, the kingdom’s aspirations are ambitious to say the least.
KAFD is home to Tadawul Tower, itself host to the Saudi stock market, the largest in the Arab world by market capitalisation, at $2.9 trillion.
It is four times bigger than its closest rival, the Abu Dhabi Securities Exchange, and 12 times bigger than the Dubai Financial Market (DFM).
Yet the Saudi market remains exactly that, a primarily Saudi market, curtailing its ability to attract international finance.
Unlike the London Stock Exchange or even the DFM, international ownership of stock in the Saudi Exchange – or Tadawul – is limited, at just 13 percent. London by comparison is 65 percent. Even Dubai is 21 percent. Not a single international company lists on the Saudi exchange.
“Financial services is one of the top spots for investment priority,” says Dane Albertelli, a senior research analyst at Source Global Research, a market research company based in London.
“The Saudis want to be market leaders in everything. This [financial sector] is the one where it’s going to be a little bit trickier, because the infrastructure isn’t in place at the moment.”
This is reflected at KAFD, physically and otherwise.
Most of the buildings are new, completed only within the past four years. One third of its 1.6 sq km area is still a construction site.
On its wide, pedestrianised pathways between the skyscrapers, business people in suits or in the snow-white thobes typical of Gulf Arab males rub shoulders with dustier construction workers.
To compete in the Gulf and globally for international money, analysts and industry experts say that Riyadh must build the necessary infrastructure, physical and financial , to support an international market.
“You’re only going to get ahead if you build that eco-system,” said Constantin Cotzias, European director at Bloomberg LP, which sells terminals providing market data and analytics. “You’re going to need more accountants; you’re going to need more law firms.”
To be sure, global law firms are increasing their presence in the kingdom, a sector for which recruiters, too, are reporting an increase in hiring, as well as for accountants.
As a result, the financial services sector will almost certainly grow this year, and by as much as 12 percent, according to the City of London-based Source Global Research, based in part on a survey of investors.
That said, the financial services sector is competing with others for resources as the world’s second-largest oil producer forges ahead with a government-led multibillion dollar strategy to diversify its economy away from fossil fuels and create more jobs for young Saudis.
Tourism, logistics, industry, data centres and renewable energy are all competing investment priorities for crown prince Mohammed bin Salman Al Saud under the government’s Vision 2030 economic and social development strategy.
Technically, Saudi Arabia has already met the bulk of its official Vision 2030 targets related to the financial sector, including increasing total banking assets to more than $935 billion, a threshold reached in 2022.
Benchmarks for other areas have not yet been reached, and therein lies the rub for the financial sector.
Saudi Arabia has major events coming up for which it needs as host to prepare, including the Asian Winter Games in 2029, Riyadh Expo in 2030 and the Fifa World Cup in 2034.
Much of the physical infrastructure for these events remains to be built, pushing investment in the financial sector further down the list of priorities and intensifying competition for increasingly limited government resources.
On March 4, the state oil company, Saudi Aramco, announced that dividends – almost all of which go to the Saudi government and the Saudi Public Investment Fund (PIF) – would be cut by $40 billion.
While the shortfall may be plugged with borrowing, it is likely to focus the country’s priorities. PIF, the $925 billion sovereign wealth fund driving Saudi Arabia’s giga-projects, seems to be scaling back budgets.
Yet the challenge is not just one sector competing with another for increasingly limited government resources. Hence the growing need for private capital.
Saudi Arabia is also competing with smaller neighbours, such as Dubai and Abu Dhabi, that started developing their financial sectors earlier.
The UAE federation, of which Dubai and Abu Dhabi are the most developed members, remains the destination of choice for international asset managers operating in the Middle East.
In December, the $69 billion British company Marshall Wace became the sixth of the top 20 biggest hedge funds globally to open offices in the UAE. In contrast, none of these top 20 has a presence in Saudi Arabia.
The kingdom’s biggest advantage over the UAE is the size of its economy, more than twice as large, and the resources on which it can call. The question is if that is enough.
Raman Aylur Subramanian, managing director at the US finance company MSCI, says: “If they really want to deploy cash, they can overtake Dubai at any point in time.
“But if I have to bet who will become the next London, I’d say it’s Dubai rather than Riyadh.”
