Saudi Arabia pledges international market integration amid Aramco mania

Saudi Arabia is committed to integrating its financial markets with the rest of the world, the country's market regulator told CNBC, as massive hype builds for the debut listing of state-owned oil and gas company Saudi Aramco.

The Kingdom aspires to become the Middle East's de-facto capital market and one of the world's largest, Mohammed El-Kuwaiz, vice chairman of Saudi Arabia's Capital Markets Authority (CMA), told CNBC's "Capital Connection" on Thursday. "That can be a big driver of economic growth in the country."

Saudi Arabia is the world's top oil exporter and the flow of petrodollars through its economy and around the world is a potent source of investment capital.

In order to achieve the aim of capital market hub, Saudi Arabia is changing regulatory requirements to gain more foreign players, reflected by recent changes to qualified foreign investor (QFI) rules. As of June 2015, certain QFIs could directly trade on the local stock exchange, known as the Tadawul. Last year, QFIs also became eligible to subscribe to initial public offerings (IPOs).

The Kingdom is also changing its market settlement policies, moving to the international 'T+2' settlement cycle from its previous 'T+0' cycle to better satisfy foreign investors.

The Saudi Stock Exchange, also known as the Tadawul All Share Index, in Riyadh, Saudi Arabia
Simon Dawson/Bloomberg/Getty Images
The Saudi Stock Exchange, also known as the Tadawul All Share Index, in Riyadh, Saudi Arabia

"We think of it as someone who has a beta max video in a VHS world. It doesn't matter who's technically superior if you can't play with the rest of the world," said El-Kuwaiz, who is travelling in Asia to attract the region's investors via the QFI framework.

Because the QFI framework is geared more towards asset managers, the CMA is also developing a parallel program for strategic investors that will enable direct investment into publicly-traded firms.

"When Saudi Arabia opened up, we started to see demand not just from financial investors but also from strategic investors looking to take stakes in the country," he explained.

International firms looking to take a stake in a publicly traded firm in the form of M&A transactions or strategic investments will now be allowed to do so thanks to this new program, he said.

El-Kuwaiz was unable to offer any insights on Aramco's international listing, noting that the decision laid in the hands of advisers and underwriters. Speculation is that the IPO, slated for next year, would offer 5 percent of the firm and raise as much as $100 billion, valuing Aramco at around $2 trillion.

"The Saudi market regulator is a disclosure-based regulator so our main point of concern is to make sure that any IPO, whether its Aramco or any other, discloses all the required information for investors to make the right call."

When asked whether Aramco was leaning towards New York as a potential destination given the Kingdom's friendly ties with President Donald Trump, El-Kuwaiz said the U.S. presidential election had not impacted CMA's strategies.

He was also unable to comment on Aramco's valuation point, noting that it was not under the jurisdiction of regulators.

However, he did note that the Kindgom's 2016 sovereign bond sale suggested strong interest for the country debt and equity markets. The country raised $17.5 billion for its debut issue in October, hitting a record for emerging markets.

"We were quite encouraged by the size of the issue as well as the degree of over-subscription ...we viewed that as a vote of confidence in 'Vision 2030' and the direction of the country going forward."

Released last year, 'Vision 2030' is a blueprint to reduce Saudi Arabia's dependence on oil and make its economy more private-sector oriented over the next thirteen years—a plan that is "independent of geopolitics in other countries," and has "staying power irrespective of the oil
price," El-Kuwaiz said.

'Vision 2030' was built on the country's areas of competitive advantage, which includes religious tourism as well as capital markets, he continued.

—Follow CNBC International on Twitter and Facebook.