Saudi Arabia plans to open its stock market, the Arab world's biggest, to direct investment by foreign financial institutions in the first half of next year, the market regulator said on Tuesday.
The opening of the Saudi market, capitalized at about $530 billion, is one of the most keenly awaited economic reforms in the world's biggest oil exporter. The bourse would be one of the world's last major exchanges to begin welcoming foreign money, Reuters reported.
"The market will be open to eligible foreign financial institutions to invest in listed shares during the first half of 2015, with God's permission," the Capital Market Authority said in a statement.
Saudi authorities want to open the stock market to create jobs, diversify the economy beyond oil and expose local firms to more market discipline. They have been preparing the reform for years and have completed most technical preparations.
But the government has delayed implementing the reform, apparently concerned about causing volatility in the market as well as the political sensitivity of allowing foreigners to build large stakes in top Saudi companies.
Currently, foreigners are limited to buying Saudi stocks via swaps involving international banks and through a small number of exchange-traded funds, which are relatively expensive and inconvenient options.
Foreigners are at present believed to own no more than about 5 percent of the Saudi market, and to account for a smaller fraction of stock trading turnover.
Potential foreign interest in Saudi stocks is huge, because of the country's strong economy - the International Monetary Fund on Monday raised its forecast for Saudi growth this year to 4.6 percent - and the presence of some of the region's top blue-chip firms.
These include Saudi Basic Industries Corp, one of the world's largest petrochemicals groups, and National Commercial Bank, the kingdom's largest lender, which plans an initial public offer of shares later this year that could be worth $4 billion to $5 billion.
"This is a massive move for Saudi and for the region," said Rami Sidani, head of Middle East investments at Schroders, a top European fund manager, which already has about $250 million invested in Saudi Arabia through indirect means.
He added that the country "will definitely attract massive inflows".
The Saudi market index jumped 1.6 percent in early trade on Tuesday in response to the news, bringing its gains so far this year to 16 percent.
Foreign investors are estimated to own about 15 percent of other, much smaller stock markets in the Gulf such as Dubai. If foreigners raise their ownership of Saudi Arabia to that level, it could mean an inflow of some $50 billion into the country.
In practice, Saudi authorities are expected to use a tight regulatory framework to ensure that inflows are much slower. The CMA said it would publish next month draft regulations for the reform; there would then be a 90-day public consultation period.
Proposals circulated by Saudi authorities to the financial industry in the past have indicated Saudi Arabia will follow a model similar to China, Taiwan and some other major emerging markets in opening its bourse.
Qualified foreign investors, awarded licences based on factors such as the amount of their assets under management, would be given quotas for their investment in the market, while there would be ceilings for foreign ownership of companies.
Under one set of proposals, foreign institutions would need to have at least $5 billion of assets under management globally to obtain licences; each institution could own no more than 5 percent of a Saudi firm, and all foreigners combined could own no more than 20 percent.
A senior Saudi banker, declining to be named because of the sensitivity of the issue, said he expected only a "handful" - perhaps 10 - investment licences to be awarded initially, and that authorities would then grant more licences gradually as they monitored the impact on the market.
Because it is closed to direct foreign investment, the Saudi market has been excluded from major international equity indexes compiled by companies such as MSCI, even as Qatar and the United Arab Emirates were upgraded earlier this year.
Opening the Saudi bourse would be expected to lead eventually to its inclusion in such indexes, helping to make the Gulf a mainstream destination for international investors. Sidani estimated Saudi Arabia could ultimately account for around 3 to 5 percent of MSCI's emerging market index.
"This is a potential game changer for the region - a very important milestone that people have been waiting for," said Salah Shamma, co-head of regional equities at U.S. fund management giant Franklin Templeton.
Following regulatory reforms in the past couple of years, the Saudi market is one of the most stable and tightly regulated in the Middle East, fund managers say. It has avoided the wild swings seen in recent months in markets such as Dubai.