Saudi Arabia needs foreign investors more than ever

This year’s fall in oil prices and US “Liberation Day” tariffs are straining the Saudi Arabian economy. The IMF last week cut its 2025 growth estimate to 3 percent from 4.6 percent and downgraded its fiscal numbers for the next three years. The Fund now sees debt to GDP at more than 40 percent in 2027. 

Meanwhile, Saudi Arabia’s currency peg to the dollar means that borrowing costs in the kingdom will track those in the US. It won’t help the Saudi government or companies if Fed chairman Jerome Powell goes slow on rate cuts. 

And this brings back the question of how Saudi Arabia will finance ongoing economic transformation as it enters the final third of the Vision 2030 programme. 

One clear answer is to increase foreign investment in the Saudi stock market.

Financial market development is a plank of Vision 2030. Saudi Arabia needs a lot of foreign capital to fund non-oil growth and drive diversification – a thriving stock market is a need-to-have, not a nice-to-have.

The stock market only opened to foreign investors in 2015. After several rounds of reforms, Saudi Arabia entered the FTSE and MSCI emerging market (EM) indices in 2019, and the kingdom is now the sixth largest country in the widely tracked MSCI EM Index.

Since the 2019 EM upgrade, the government has not been complacent. It has sold additional stakes in public companies and encouraged private companies to list.

The market’s depth – it turns over $1.6 billion a day – and the introduction of short selling have attracted high-frequency traders and hedge funds. Non-Saudis now account for one-third of daily turnover.

However, while the market is popular with traders, foreign ownership is far lower than it should be.

Our estimates show non-Saudi investors owning roughly 24 percent ($120 billion) of market free float. A little less than half of this amount is owned by index-tracking funds of the kind run by iShares and Vanguard. They must own Saudi stocks at their index weight (4 percent for the MSCI EM Index).

But active investors own far less of the market – our sample of EM funds has less than 2 percent of total assets in Saudi stocks. 

Of course, Saudi Arabia is new to EM – many seasoned emerging market investors are still learning about the market and the country. That will take time. But in the meantime, there is one area where the authorities can do more to attract stickier foreign investment – IPOs.

News stories about Saudi IPOs often feature a congratulatory note that the offering was massively oversubscribed. However, the success of a new listing is not just about the subscription ratio, but also about broadening a company’s ownership structure. This change in structure gives companies access to deeper pools of capital and should support longer-run performance. 

However, foreign investors are frequently disappointed by the allocations they receive in Saudi IPOs, which they still see as favouring local and regional investors.

Recent new listings have been underwhelming post-IPO. A basket of five new stocks has underperformed the market by an average of 4 percent since listing this year. Such underperformance may be because foreigners are not getting enough shares.

Active EM funds that receive a decent number of shares in an IPO are likely to top up their holdings after the stock is listed and so support the share price. Funds that get only a low allocation are more likely to sell on the opening day. 

So what can the Saudi Arabian authorities do? They should push for IPOs that genuinely broaden the investor base. Companies that list should allocate more shares to institutions outside the region that want to take a long-term view and may be subject to different incentives from local investors. 

Success breeds success in IPOs, as in so much else. If you give these foreign institutions more of what they want – i.e. bigger allocations – they will come back for more. And, slowly but surely, foreigners will own more and more of the market.

New listings should be opportunities for foreign institutions to build cornerstone stakes in growing companies. They bring capital into Saudi Arabia, increasing their exposure to the economy and freeing up local capital to invest in other ventures. 

And the numbers are meaningful. If foreign investors bought a further 10 percent of the Saudi market’s free float today, that would mean $50 billion in inflows. That’s not far off the IMF’s estimate for the kingdom’s budget shortfall this year.

Simon Kitchen is a founding partner and macro-strategist at Emerging & Frontier Capital. He has spent over 20 years working in Mena financial markets.

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