Al Al-Sheikh expected to oversee reform of Saudi Capital Market Authority

Executives in Riyadh have been speculating about why Mohammed Bin Abdulmalik Al Al-Sheikh was named president of the Capital Market Authority, just months after he took a job in Washington. A likely explanation is concerns over the CMA relationship with the King Abdullah Financial District, and the desire to tighten stock exchange practices. Published in Gulf States News, 9 May 2013

When Mohammed Bin Abdulmalik Al Al-Sheikh was appointed chairman of the Capital Market Authority (CMA)’s board of governors in February, it came as something of a surprise. Just a few months earlier, in September 2012, he had taken up a job in Washington DC as an executive director of the World Bank, where he was expected to stay for a few years at least. Instead, he was back in Riyadh, and in charge of the stock market regulator.

The official announcement gave little away. A typically bland statement published by the official Saudi Press Agency on 5 February merely said that King Abdullah had issued a royal order relieving Abdulrahman Bin Abdelaziz Al-Tuwaijri of his post, replacing him with Al Al-Sheikh “as CMA president at the rank of minister”, with immediate effect.

Since then there has been a lot of speculation about why the change was made. “I thought he would be at the World Bank for two to four years,” one Riyadh banker told GSN. “I was very surprised when he was called back to become the head of the CMA. It was unexpected.”

“He had only just arrived at the World Bank and that was clearly a very prominent role,” said another executive linked to the financial sector. “I don’t think he came back because he was homesick or because his kids weren’t going to get good enough schooling in Washington.”

The thinking in Riyadh these days revolves around two issues, both of which are likely to have contributed to the CMA spring clean. The first is a perceived need to tighten trading practices on the local stock market, the Tadawul, and the second, probably more significant, is criticism of the relationship between the city’s newest business zone, the King Abdullah Financial District (KAFD), and the CMA under Al- Tuwaijri, who was appointed in 2006.

Real estate and governance

Lying on the edge of Riyadh, the $10bn KAFD is still under construction. The 1.6m square metre site, first announced in May 2006 (around the time of Al-Tuwaijri’s appointment) is now being developed by the Rayadah Investment Company, a subsidiary of the state-owned Public Pensions Agency, but it was conceived and launched by the CMA. The close link between the financial regulator and the real estate market prompted some disquiet within Riyadh. “The regulator should not be a real estate developer,” said one bank executive in the city.

“Real estate and governance don’t go well together,” another source said. “When the story emerged about how much money had been spent on what are probably speculative investments, everyone said that’s not the job of a regulator. If we want real estate we’ll set up a real estate company or a real estate arm of one of the ministries, but the CMA should not be doing that. That is fundamentally what has happened and why there has been a change of governor.”

The CMA will still move its headquarters into the KAFD, into what will be the tallest tower on the site, but it will not have to worry about the rest of the development, which may be just as well. There is a distinct lack of enthusiasm for the development among the city’s business community, particularly because of the high price of office space, and the developers are struggling to attract enough tenants to fill all the buildings.

Tadawul clean-up?

Al Al-Sheikh’s appointment is also likely related to the perceived need to clean up the Tadawul. The issue of market manipulation on the Saudi exchange became an international story in early March when a spat broke out between US magazine Forbes and Saudi businessman Prince Alwaleed Bin Talal over the pricing of shares in the prince’s main business, Kingdom Holding Company (GSN 942/12). The two sides disagreed about whether the Tadawul’s valuation of the company was to be trusted and, by extension, where the prince should rank in Forbes’ annual Rich List.

Whatever the rights and wrongs of that particular case, there is a wider sense that market practices need attention. “There is a willingness to prevent highly speculative trading and I think the new appointment was made to clean up the market. That’s the feeling we get,” one equity analyst said. “For the CMA to tackle it will be very difficult. You’ll never curb speculation entirely. There is asymmetric information whether you like it or not. But we are going to see concrete steps taken. The sense is that they are doing something.”

Al Al-Sheikh’s background suggests that he is well qualified to deal with such a task. Before getting the World Bank job, the Harvard Law School-educated lawyer had been a partner at the Saudi office of Latham &Watkins, and before that was at White & Case. During his career he has specialised in corporate finance issues including mergers and acquisitions, capital markets, project finance and corporate restructuring.

There is no doubt that the Tadawul is a volatile market, not least because it is dominated by retail investors rather than the institutional investors who take a leading role in other markets.

Not everyone sees market manipulation as a significant problem, or any worse than it is in other markets, but Al Al-Sheikh stated explicitly on 7 April that the CMA wanted to limit “high levels of speculation”. Speaking to reporters on the sidelines of a financial conference in Riyadh, he also said Saudi Arabia was finalising a regulatory framework which would open up theTadawul to international investors – something that has been mooted for years.

“There are a number of government entities, including CMA, that are looking at [direct foreign investment]. We’re finalising a regulatory framework within certain parameters,” he was quoted by Reuters as saying. Few expect the changes to happen quickly.