Saudi Arabia’s Capital Market Authority (CMA) is “finalising the regulatory framework” for the opening up of the Saudi Stock Exchange (Tadawul) to foreign investors, according to Mohammed al-Sheikh.

The newly appointed head of the CMA did not comment on a timeframe for allowing direct foreign investment in Saudi shares, but banking sources in the kingdom say they are expecting it to occur in the next six to 12 months.

International investors currently face restrictions on how they can invest in Saudi shares, which puts many off buying local equities. If foreign investors were allowed to buy shares more freely there is expected to be a flood of interest from them.

Al-Sheikh added: “The market currently doesn’t need liquidity from foreign investors, what we want is their technical expertise, research capabilities, and development of human capital.”

Ultimately though, the decision to approve the opening of the Tadawul to foreign investors will be a decision for the wider Saudi government. In the past the government has held-back the process worrying about a flood of new money into the market destabilising it and hitting the individual local investors who dominate trading. At present, trading on the Tadawul is 93 per cent retail, and the CMA wants to see this institutionalised.

Where the CMA sees an opportunity to more quickly develop the capital markets is in the sukuk (Islamic bond) space. Al-Sheikh says that in Saudi Arabia the debt capital markets make up just 6 per cent of total borrowing, compared to an average in the G20 countries of 60 per cent, and around 40 per cent in other emerging markets. “In the short-term we expect to see this increase,” says Al-Sheikh. He added that the CMA was currently “doing some analysis to see why the debt markets are not developing”.

Riyadh has made developing the bond markets a strategic priority and activity has picked up considerably in the past two years, with high-profile issues to support projects by Saudi Aramco and the General Authority of Civil Aviation.