The decree issued recently by King Abdullah, Custodian of the Two Holy Mosques, to appoint Abdul Rahman Al-Tuwaijeri, secretary-general of the Supreme Economic Council, as acting chief of the Capital Market Authority (CMA), replacing current chairman Jammaz Al-Suhaimi, can be considered a right step in boosting investor confidence in Saudi Arabia. Additionally, last week’s announcement on privatizing the bourse and moving it to within the new King Abdullah Financial District in Riyadh was another positive move in ensuring robust future economic growth prospects for the Kingdom.
As a Saudi citizen, I welcome these moves, and would like to make some recommendations in light of the demoralizing effect that the Saudi stock market crash has had on the many hapless investors who were left ruined for life within the last three months.
The two major crashes, which hit Saudi bourses on March 14 and April 11, showed us the fragility of the (so-called) 16th largest market in the world (in terms of market capitalization). But it did not stop there. The Tadawul All-Share Index (TASI) shed 21.21 percent or 2,704.56 points last week, the largest weekly decline in the bourse’s history, closing on Thursday at 10,046.83.
Yet, this was not the scene three months ago. Euphoria reigned in the markets, which showed in a continuation of the ongoing rally for the seventh year in a row – an upward trend started in March 1999, when the index stood at 1,327. There were more than three million online trading accounts by end-January, and the TASI reached a high of 20,634.86 on February 24, 2006. In the last three years, around nine million Saudis have been active in the markets.
The fact was that speculators dictated market movements, and not the CMA. The March 14 plunge was a severe reaction by speculators when the CMA decided to impose a daily price movement band of 10 percent. The April 11 crash was a response to the CMA suspending two dealers on suspicions of market manipulation. The lack of corporate transparency, small-time and first-time investors’ ignorance of the fundamentals of investments, and the long-term phenomenon of unmonitored margin lending by banks were some of the other factors that aggravated the plunge.
In this volatile period, feel-good measures such as setting up a national committee for joint stock companies at the Council of Saudi Chambers of Commerce and Industry (CSCCI) to safeguard the interests of 77 listed companies and a decision to allow foreigners to trade in the Kingdom’s bourses did not help. Neither did government intervention to stem bleeding on the markets – whether directly in the form of state funds or indirectly through banks – help stop the downward spiral.
While the financial and economic impact can be calculated with statistics, the ensuing social and security problems that arose among the masses cannot be measured in tangible terms. As debts rose, families broke up or were left divided in opinion over financial issues. Future dowries were utilized on stock markets, and brides were left high and dry. For many, the debts will take more than 10-12 years to pay off. Cars are being sold off and futures have turned uncertain. It must also be noted that even though the Dubai, Abu Dhabi, Qatar, and Kuwait markets started seeing corrections before Saudi Arabia, the situation was reversed to a scenario in which when the Saudi market went south, other regional markets followed suit.
I feel that certain measures could be implemented to prevent the recurrence of such an economic and social disaster in Saudi Arabia. A sea change is necessary in corporate transparency levels. The creation of a clear legal framework, which will deal with those found violating the market regulations and deter similar scenarios in the future, is imperative. Violators must not just be fined, but named and shamed in print. The media, especially the broadcast segment, must also play a responsible role. The latter must make sure only to invite financial experts who understand the stock markets for televised interviews. The CMA should also be more visible on television.
While the government, as well as banks, intervened at the appropriate hour, possible measures to create greater security for investors until the setting up of the King Abdullah Financial District are outlined below:
The Role of the CMA:
• Apparently, it is not enough to impose fines for illegal trading. Greater stringency by the CMA should mean that the market authority has to identify the guilty and imprison them (as seen elsewhere in the world) so that it can deter potential future violators.
• Capacity-building will remain the most pressing need until the inauguration of the financial academy in the King Abdullah Financial District, which will provide training and education for those wishing to enter the market. Till then, the CMA has to recruit trained employees who understand stock markets and the intricacies of trading. This could also mean bringing in foreign experts as consultants to the CMA. The latter could benefit from the experience of the former.
• The market authority also has to upgrade its software to meet the market's daily demands. Often, the Tadawul service is interrupted during opening hours, which is unprofessional for a market of its stature.
• A two-tier market should be created. One tier should list the A shares (the Sabics, and so on), while the other should have the B shares (the Bishas of the market) along with companies that have closed their IPOs.
• The stock market should rely on circuit breakers. The 10 percent price movement limit should either be modified and refined – for instance, low-value stocks should have a smaller cap than high-value stocks.
• There is a strong need to develop derivative and hedging markets.
• The CMA should allow short selling in the market, as it is an essential part of the price recovery mechanism.
• Market makers have to be established so that there is a better flow of liquidity on the bourses.
The Role of banks:
• Banks also have to be monitored. They should be fined if they have not upgraded their Tadawul systems. Often, people complain that they cannot execute an order on time. This is due to too little investment into software systems that can execute the large number of orders.
• In the long run, it would be negative for the banking sector to take investors for a ride that is expensive and breaks the latter's trust. All the banks should be regulated in terms of margin lending, and should be monitored and controlled impartially by SAMA. The central bank should have cut back money supply even before November 2005, when it took a decision to control access to money.
• Banks should maintain transparency about the trading accounts of insiders, and must declare whether their board members or managements have any vested interests in the stock market.
The Role of the Government
• While it is commendable that the government intervened in the recent crisis, this is not an appropriate situation in the long run. The government could consider slowing down supportive measures to the stock markets – both directly through GOSI and the PIF, and indirectly by purchasing stocks through banks. Banks should also stop receiving instructions to buy certain stocks to prop up the market.
• The government should not interfere with 'feel good' statements at a time when the market is plunging downhill. After the first crash in March, the government made many such statements, leading people to believe that a crash had actually been averted. In reality, many people entered the market when it was at 15-16,000 points, only to realize three weeks later that the market was headed for its next crash.
• If the government is calling for more transparency, everyone should follow that call. Banks, for instance, should publish their research. The CMA should also be transparent; its website is inadequate and has old data.
• Companies should be reprimanded if their balance sheets are full of unrealized gains from stock market trading. These companies should be delisted from the market.
• Companies should provide detailed information on the background of their board members and also provide details of the latter's trading accounts, as is the case with international corporations.
It is estimated that Saudi Arabia will need about SR 3 trillion in project investments over the next 20 years in various economic sectors. But many financial institutions have so far been looking at the short-term market and quick profits. They have been extending loans for share trading and making commissions on larger and larger volumes of trading, and have been reluctant to take on longer-term, riskier investment projects. This needs to change. Banks also have a responsibility to turn their profits into productive investments in the country.
The youth of the country also need greater direction than just the stock markets and a fascination for short-term risks at great cost to their futures. The lessons of the real estate speculative madness of the 1980s in the country should be kept in mind here. A greater focus should also be placed on education and vocational training for youth if they are to be prepared to participate and compete globally in the wake of the WTO.
It is true that Saudi Arabia is taking education seriously – in the government’s 2006 budget, new funds were earmarked for the construction of 2,673 new schools, three new technical colleges, and 15 vocational training centers. But this is not enough. As the youth graduate and aim to integrate into the working community, an estimated 160,000-odd jobs will have to be created every year in order to meet the demand for employment. As a consequence, the Saudi government has already sought to ban the employment of expatriates in over 40 separate job categories. A recent Samba report said that around 70 percent of the population is made up of people under the age of 30. More importantly, around 41 percent of the population is under the age of 15. Saudi Arabia's indigenous population growth averaged 2.49 percent from 1992 to 2004. According to the 2004 United Nations report on World Population Prospects, the population of Saudi Arabia will grow to 37.2 million in 2025 and 49.5 million in 2050.
Given this scenario, I would recommend greater integration between the public and private sectors in order to create an attractive environment for individual and institutional investors. This will ensure that Saudi Arabia’s stock market retains its unrivalled position, but on more stable foundations.
© 2006 Al Bawaba (www.albawaba.com)
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