The Saudi Arabian economy, while strong and stable relative to other countries in the region, has entered a period of transition, largely due to lower oil prices and the ongoing war in Yemen. The IMF had forecasted a GDP growth of 1.2% versus 3.5% in 2015. In early 2016, the country’s leadership adopted a national transformation plan, ‘Vision 2030’, the aim of which was to modernize and diversify the economy. In particular, Vision 2030 focuses on increasing employment, particularly in the private sector.
A number of new regulations were passed in 2016 to further bolster the economy ahead of proposed privatizations and public-private partnerships (PPPs). There will also likely be continued investment by the private sector in the retail, power, renewables, transport, education and healthcare sectors.
International confidence in Saudi Arabia was recently demonstrated when it raised US$17.5 billion in its debut sovereign bond resulting in the largest-ever emerging market bond. Saudi Arabia has also announced it intends to launch an IPO of a small portion of its crown jewel, Saudi Aramco, which is expected to generate significant international interest.
The financial services sector in Saudi Arabia is undergoing a period of bold transformation. The Capital Market Authority (CMA), which regulates the financial services and asset management industries in Saudi Arabia, has long sought to encourage asset managers and investment banks to grow assets under management by tapping retail markets and international investors. The CMA also wants to encourage managers to develop products which can be accessed by the Saudi public in order to encourage individuals to invest their income in the Saudi domestic market.
Review of 2016
As such, throughout 2016, the CMA has released numerous regulations covering the establishment of new corporate vehicles, the IPO process and foreign investment in Saudi Arabia and has promised a complete revamp of existing financial services regulations. Two regulations in particular are pivotal for asset managers looking to raise Saudi Arabia-targeted funds: the amended investment fund regulations (the New Funds Regulations) and the real estate investment-traded funds instructions (the REIT Regulations).
After a consultation period, the New Funds Regulations were released in May 2016 and became effective on the 6th November 2016. The New Funds Regulations govern the formation, offering and operations of all private and public investment funds in Saudi Arabia, except publicly offered real estate funds, which are governed by the REIT Regulations. The issuance of the New Funds Regulations was long expected as the CMA had publicly acknowledged for years that new regulations were in progress.
In August 2016, the CMA released the draft REIT Regulations, which provide for certain public real estate funds to be listed on the Saudi Arabian Stock Exchange (Tadawul) as real estate investment-traded funds (REITFs). These REIT Regulations were initially subject to a consultation period, which ended in late August. To date, the only listed funds in Saudi Arabia are exchange-traded funds. Riyad Capital listed the first REIT in November 2016. Two additional REITs are expected in December.
Both new regulations provide opportunities to investment banks, private equity firms and asset managers to expand their product offerings and access additional investor bases.
A new Saudi Arabian Companies law also came into effect on the 2nd May 2016. The new Companies Law was widely welcomed. For the first time, for example, it permitted the possibility of single shareholder limited liability companies. It also allowed for joint stock companies to be formed with two rather than a minimum of five shareholders.
Further, the amount of reserve capital required was reduced from 50% of the stated capital to 30%. There were also important changes regarding potential shareholder and director liability as well as reducing shareholder liability with regards to a corporate entity not having sufficient capital.
The Competition Law also resulted in examples of its enforcement. In one example, various soft drink companies were fined SAR5 million (US$1.33 million) for alleged price fixing. Parties are now more actively monitoring activities to ensure such are in compliance with the Competition Law.
The CMA has also approved the Rules for Qualified Foreign Financial Institutions Investment in Listed Shares and has amended the same to ease the ability of foreign parties to participate in listed shares in Saudi Arabia.
Preview of 2017
We expect the various privatization and PPP initiatives will be implemented in early 2017. A number of such initiatives are being pursued in the healthcare, education, transportation, housing and energy industries. We expect that many of these projects will seek Shariah compliant leveraging including Sukuk. Further various parties are forming Shariah compliant funds to provide equity to such projects.
There will likely be a further focus on the employment of Saudi Arabian nationals with initiatives that already include new regulations and test projects to provide part-time work for Saudi Arabian nationals including females. Certain sectors are further ‘Saudizing’ in addition to mobile phone shops; other retail sectors are expected to move to 100% ‘Saudization’ in 2017. Further certain job titles are being reserved for Saudi Arabian nationals including all human resources jobs.
2016 was a record year in terms of venture capital investments in Saudi Arabia, and it appears the government is taking further steps to further encourage venture capital and SME investments in 2017.
Conclusion
Over the last few years, the CMA and the Saudi Arabian General Investment Authority have been focused on issuing new regulations and new products to help spur the domestic market and foreign investment into Saudi Arabia. We further expect the Saudi Arabian government to work more closely with the private sector to participate in the development or financing of hospitals, schools, housing and the generation of power.
Nabil A Issa is a partner at King & Spalding (in association with the Law Office of Mohammad Al-Ammar in Riyadh). He can be contacted at [email protected].