Saudi stock exchange rises after reforms announcement

TRANSFORMATION ON TRACK: Saudi Cabinet ministers attending a press conference on the National Transformation Program (NTP) in Jeddah. (AFP)

JEDDAH: Saudi Arabia’s stock market rose on Tuesday after the government announced details of National Transformation
Program 2020 (NTP).

“Definitely, there is a positive effect on the Saudi stock market from the detailed NTP that represents a blueprint of achieving Vision 2030,” Tamer El Zayat, vice president, senior economist at National Commercial Bank, told Arab News.
The NTP will provide further support to oil prices as the Kingdom aims to maintain the same capacity of 12.5 million barrels per day up until 2020, mitigating oversupply concerns, he added.
His remarks came as Tadawul All-Share Index (TASI) closed 0.9 percent higher Tuesday, in the highest trading volume for two weeks.
“I think the NTP will be positive for the Tadawul,” said James Reeve, deputy chief economist and assistant general manager, Samba Financial Group.
He said the Capital Markets Authority has already announced significant moves to lift restrictions on foreign institutional investors, including the relaxation of short-selling activities.
“Of even greater potential is the Tadawul’s likely inclusion in the MSCI Emerging Market index— a move that we expect in 2017. Inclusion in this index will mean an automatic allocation of assets by large fund managers, with additional flows attracted by the sheer size of the market and, hopefully, an improving corporate performance. By 2020 we think that such inflows could be worth more than $20 billion a year,” said Reeve.
The NTP is part of the Vision 2030 reform scheme launched in April by Deputy Crown Prince Mohammed bin Salman to prepare for a future with lower oil revenue.
A 110-page Saudi reform document released on Monday night contained hundreds of policies and targets, including major austerity measures.
The government aims to reduce public salaries and wages as a proportion of the state budget to 40 percent from 45 percent by 2020, and cut water and electricity subsidies by SR200 billion ($53 billion).
Investment firm EFG Hermes commented: “Our first reading reaffirms our view that Saudi companies and consumers face a period of relative austerity over the next few years, and we stay underweight on Saudi equities.”
On Tuesday, TASI rose by 56.35 points to close at 6,533.42 points. The value of traded shares reached SR3.95 billion. Petrochemical Industries index gained 1.38 percent.
Tamer El Zayat also told Arab News that the NTP complements the recent easing in regulations for QFIs that reduced the AUM needed from $5 billion to around $1 billion.
“Yet, the magnitude of this structural change and the challenges embedded within must not be taken lightly, some sectors might be impacted negatively by the removal of subsidies and others positively by the drive toward localization,” he added.
The economist said an initial investment must be made before garnering the benefits from diversification, with the government underscoring the total 5-year cost of NTP initiatives at SR268 billion, which will be accompanied by a 30 percent debt to GDP by 2020, in my estimates around SR900 billion.
“I do believe that 2020 will be the inflection point toward economic sustainability, with Tadawul following an upside trajectory, albeit the expected high volatility as companies and investors assess the winners and losers come 2020 and 2030,” said El Zayat.
According to Reuters, Mohamed El-Jamal, managing director of capital markets at Abu Dhabi’s Waha Capital, said: “The absence of a direct corporate tax and a tax on dividends are both positive catalysts for the Saudi equity market in the short term.”
He added: “Sectors that are expected to benefit from the plan are ones linked to religious tourism, private education, mining; whereas sectors like petchems and materials will see their subsidies phased out over the next few years.”
Saudi Arabian Mining Co. (Maaden) rose 1.8 percent. Energy, Industry and Mineral Resources Minister Khalid Al-Falih said the Kingdom planned to issue new licenses covering exploration for minerals and to build more industrial cities.
“This opens huge possibilities for future investment from foreign companies into the Saudi resources space, because there is vast untapped potential,” Jassim Al-Jubran, senior analyst at Saudi-based Aljazira Capital, said according to Reuters.
In the near- to medium term, Maaden will remain the prime beneficiary of the mining industry push, he added.
Medical insurer MedGulf, which could benefit from the plan’s intention to develop the medical sector, rose 4.9 percent in unusually heavy trade.

Retailer Fawaz Abdulaziz Alhokair Co. jumped its 10 percent daily limit after it received an offer from a fund managed by a Dubai-based investment bank to buy its investment in Spanish clothing retailer Blanco for SR350 million ($93 million).
“Investors clearly welcomed this move by Alhokair because Blanco was eating at the company’s profits and was one of the main reasons why the company barely broke even in its latest quarterly financial reports,” Jubran said the report.
Dar Al-Arkan, one of the Kingdom’s largest property developers, also jumped 10 percent. The company, which reported declining profits in six of the last seven quarters, may benefit from the reform plan’s goal of boosting the construction sector’s contribution to gross domestic product to 10 percent from 5 percent.