The Saudi Arabian Stock Market was established in 1985. Economic experts formulated the idea when a government unit was formed to manage and control Saudi Arabia’s securities market. The authorities went further to formulate a regulatory body for Tadawul, the Arabic name for the Saudi Stock Exchange also referred to as the Saudi Capital Markets Authority (CMA) in 2003. This paper attempts to define a stock market. A stock exchange is a center or location where an extensive network of transactions based on purchases and sales of equities and securities take place. It may be a converging point for buyers and sellers of shares or equities. This research paper underscores the point that the stock exchange or market may not be necessarily linked to a physical structure or facility. Additionally, the rapid advancement of information has led to the creation of new technology players in the industry. Technology may reduce the need for people to physically do business in the premises of a stock market. However, this study notes that the dominant terms in the stock market environment consist of equities and securities. The term equity may refer to a product of the acquisition of partial ownership of a firm, either by means of an investment of capital or purchase of shares in a given company. Securities represent a wide set of financial assets like bank notes, bonds, and stock futures. Forms of equities like stocks also feature under the aspect of securities. Financial analysts prefer to use the term securities. A number of them tend to use both terms interchangeably.
This study highlights business trends in the Saudi Stock Exchange (SSE) which also goes by the acronym SSE. This research will examine the merits and demerits that characterize the SSE from 1985 to date. Moreover, this paper will evaluate global economic indicators that reinforce the upward and downward trends in the Tadawul. The assessment will review the role of American investors and their influence on the Saudi stocks. Furthermore, the paper will examine the over reliance on Americans by the Saudi people in the Saudi financial sector. Above all, the paper will also evaluate the economic variables that dominate the Saudi Stock Exchange.
A brief account of the Saudi Stock Exchange
As mentioned earlier, the Saudi Stock Market started business operations three decades ago. Before this period, the state did not trade in stock markets. The formation of the SSE fulfilled the need within the Saudi state of an institution that would develop and regulate the country’s security and equity market. However, it took eighteen years to form an equity regulatory body known as The Saudi Capital Market Authority. The Saudi royal family issued the Capital Market Law in July 2003. The CMA’s functions involved regulation and development of the Saudi Arabian Capital Market. It provided the relevant legislation for the execution of the Arabian capital business standards. In the contemporary perspective, it fosters an appropriate investment environment required to create confidence in the investors and the administration standards of the SSE. It also reinforces accountability and disclosure rules in all listed organizations. It safeguards companies and agents from unfair competition in the market. One of the organization’s crucial roles involves protection of businessmen and the citizens from illegitimate activities like corruption, cheating, swindling, exploitation and undue pressure. The SSE continues to record fraudulent activities in spite of stringent measures the organization develops on a yearly basis.
This research reveals that Rana Investment established in 1986 is an authority in Saudi Arabia’s business sector. In view of its mandate, the institution offers advice and inputs to Saudi authorities regarding the financial sub-sector (Heidari &Wu 2009). The organization also provides investment options in regard to the performance of stock markets in the SSE. The business is owned by a unit of prominent and distinguished business families in the Saudi Arabia dynasty. The company liquidated 25 % of its assets to an American financial services firm known as Smith Barney. During that period, Rana Investment was the singular financial services unit that possessed a permit to give investment consultancy. Rana’s strong belief in American investment led it to welcome American investors to reform the Saudi Stock Market during the crisis period. This paper will define the role of this organization in the Saudi Arabia Stock Market. This study also notes that the SSE’s All Share Index (TASI) is a crucial stock market value that tends to evaluate the progress of all businesses in the Saudi Stock Exchange Market. This paper observes that the Tadawul is the biggest stock market in the entire Gulf region.
The performance of Tadawul
The year 2012 oversaw a robust growth in Brent’s crude oil prices enhanced by tremendous corporate growth. Additionally, the merit triggered a corresponding increase in the Saudi Stock Market as equities appreciated in value, which resulted in a positive gain, in its target of 25 percent share improvement during the first quarter of 2012. However, Tadawul failed to maintain or increase the profit margin as it experienced a significant fall in the second quarter from 4.4 to 4.7 percent.
The Saudi Stock Market (Tadawul) continued to experience a series of upward and downward trends in its performance through the years. The Saudi Arabia Stock Market All Share Index (TASI) increased to 9576.87 points in April 2014 from 9475.71 values in March of 2014. However, in January 2014, the SSE recorded 5008.52 index points. It achieved a maximum target of 20634.88 index points in February 2006. The SSE recorded 1140.55 index values in May 1995. These varying points show that the Tadawul has not been experiencing stable economic progress.
The collapse of Tadawul and the factors that led to it
In this section, this research seeks to review the disintegration and the incidents that led to the collapse of the SSE. The crisis occurred mainly between the period of 2005 to 2009 spreading over into a period in the 2013 financial year in the Saudi Stock Market. Owing to the overwhelming success enjoyed by the Saudi Stock Market since its inception, many foreign businessmen and the Saudi population invested in the equity market in Saudi Arabia. The country had a royal family which sought to share its assets among its people through initial public offerings (IPO’s). The family’s intention focused on privatization of public enterprises and diversification of the kingdom’s wealth. However, the initiative did not succeed because the stock market became heavily congested. This aspect decreased the worth of the stock market leading to the eventual collapse of the SSE. The state provided a misleading counsel to the Saudi citizens by making them perceive the purchase of IPO’s as a way of making “quick” returns or attaining financial stability. A group of business specialists had predicted the collapse of the SSE and consequently issued a warning to potential investors. The authorities had created a situation where an average Saudi saw the stock exchange as a link to “quick” money rather than as a foundation for long-term investment as noted by Mazen Hassounah, the current Chief Executive of Rana Investment.
The uncertainty regarding the global economic outlook and the European financial crisis continued. The world experienced a sudden drop in the prices of crude oil and low demand from key markets. The SSE hence suffered tremendous setbacks. The European zone crisis prompted a huge drop in the demand for oil products. This aspect further degraded the SSE. In a different perspective, set economic indices like prices, market share and stock market values recorded low performance (Houtpt & Embersit, 2011).
Crude oil production in Saudi Arabia decreased from 9841 to 9744 barrels per day in November 2013 as reported by the U.S Energy Information Administration. Additionally, the month of June 2013 experienced a drop in oil prices. The Tadawul market values fell by 4.25 percent bringing about a renewed four-month fall in oil prices on June 2 of 6,683.18 points followed by the petrochemical sector. The Saudi Arabian shares continued to fall, led by the Saudi Basic Industrial Corporation (SABIC), the biggest company by market worth in the Middle East and the Al Rajhi Bank. SABIC dropped by 13 % to SR 55.25 and Al Rajhi, the largest commercial bank in the country by market value, lost 9.9 percent to record SR 60 in June 2013. The hotel and tourism sector suffered 2.7% decline and this poor performance in the share index adversely affected the Saudi Stock Exchange. Financial experts called for reforms in the business sector of the oil rich Saudi Arabia. The government sought to revive the SSE. The Saudi authorities were hopeful that the revival initiative would improve the stock markets (Philip & Marshall, 2010). The Saudi government hoped that the reforms would stop the crisis. The state hoped that the regulations would rationalize the stocks and attract American and European investment sectors. Mazen Hassounah of Rana Investment, a firm believer in the American business philosophy underscored the need for “for Saudi Arabia to attract American investors.” This study observes that the Saudi state did not consult economic experts prior to announcing the IPO. The situation may have been different had the government not exploited the gullibility of its citizens to the IPO.
The Saudi government and people shared an optimistic outlook in the fight against a regressing economy. The SSE later showed signs of improvement. The Saudi Stock Exchange had undergone a number of crises from 2006 to 2013. This paper notes that, in recent times, the SSE has shown remarkable progress in the stock markets. Oil values are expected to remain stable for the remaining period of 2014. A large amount of shares bought in the SSE in 1999 have risen by more than 800 percent in 2014(Wehinger, 2013).
At the time of assessing current stocks relevant to this study, the Saudi Arabia Stock Market improved in April 2014 due to the support of food producers, Almarai. The Tadawul All Share Index (TASI) ended up at 0.3 percent under the ratings of insurance companies and food producers. Almarai continues to show improvements rising by 5.6 percent from SR73.00 in the SSE followed by NBK Capital.
This research paper also reveals that a number of executives of Tadawul, at the just concluded Ninth Euro Money Saudi Arabia Conference, suggested that most companies listed on the SSE could conduct business in the stock market in the future. The Saudi government must also conduct adequate research on ways of improving the SSE. This paper observes the need for the Saudi government to provide enough funding to economic experts and educational institutions. This aspect may help in regulating the overreliance of Saudi Arabia on oil production. The danger that overreliance on oil poses to the country features in the manner in which the SSE continues to undergo challenges of poor performing markets. The government should structure the education system in Saudi Arabia in a way that students also learn unique fields of study. Agricultural production through irrigation may perform better in the SSE because Saudi Arabia features as a major importer of food. The state may also establish strict control measures by enacting regulation on the provision of IPO’s to the public. This aspect contributed to the collapse of the Tadawul. The government may enhance the creation of efficient communication structures that may not only educate the public but also caution it against uncontrolled investments in the SSE. The SSE should formulate efficient monitoring and evaluation structures that can predict possible losses in world markets to prevent a situation like that which occurred within the SSE in 2013.
Heidari, M., &Wu, L. (2009). Framework for Pricing Interest Rates and Interest Rate Tools. Financial and Quantitative Analysis Journal, 44(3), 517-550.
Houtpt, V., & Embersit, J. (2011). A Method for Evaluating Interest Rate Risk in Commercial Banks. Journal of Federal Reserve Bulletin, 77(1), 625-37.
Philip, D., & Marshall, J. (2010). Pricing Long Bonds: Pitfalls and Opportunities. Journal of Financial Analysts. 1(1), 32-39.
Wehinger, G. (2013). Risks Ahead for the Financial Industry in a Changing Interest Rate Environment. Journal of Financial Markets Trends, 2010(1), 67-85.