Saudi Arabia’s decision to open up its stock market (Tadawul) to foreign investors is a significant step forward for both the kingdom and the wider Gulf region. It will trigger a surge in foreign investment inflows and establish the Gulf as key market to add any international investor’s portfolio. Although no specific timetable for the opening of the kingdom’s equity market has been outlined, it is expected that it will happen in the first half of 2015.

The opening of the largest exchange in the Arab world to foreign investors has been under discussion for years and the news that the Saudi cabinet has finally approved the move this week has been widely welcomed.  

The Tadawul is highly attractive to foreign investors. It is capitalised at about $530bn and Saudi companies listed on the exchange include Saudi Basic Industries Corp (Sabic), one of the largest petrochemical groups in the world. The exchange is currently very buoyant, with the Tadawul All Share Index up by 46 per cent over the past two years.

Saudi Arabia’s positive macroeconomic indicators will further fuel investor interest in the exchange. The Washington-headquartered IMF forecasts GDP to grow at 4.6 per cent in 2014, higher than last year’s growth figures. High oil prices continue to fuel large fiscal and external surpluses.

The potential for growth in Saudi Arabia puts it on a par with other emerging markets, but in contrast to many emerging markets, Saudi Arabia also benefits from a stable government and low sovereign credit risk.

The anticipated interest in Saudi Arabia’s market is also expected to draw further investor interest in other Gulf markets, such as Dubai, Doha and Abu Dhabi.

The opening up of the Saudi market could also position it for inclusion in the MSCI Emerging Market Index, drawing in additional investment. The UAE and Qatar were upgraded from frontier to emerging market status earlier this year.  

Saudi Arabia, however, is unlikely to get carried away with the excitement of opening up its market.  

The kingdom tends to move slowly and cautiously with reform, and will not break away from old habits this time around. The Saudi authorities are expected to place strict limits on foreign ownership and ban investment in certain sectors.  

But despite restrictions, foreign investors remain eager to find out how they can tap this rich and previously inaccessible exchange.