19/06/2017 02:26 AST

Saudi Arabia is expected to be upgraded by MSCI to emerging market status by mid-2019, a move that will unleash as much as US$50 billion in foreign capital inflows with a trickle-down effect to the Mena region, experts said.

MSCI will decide this Tuesday whether to include Saudi Arabia on its watch list for potential reclassification as an emerging market, a process that is expected to be followed by an upgrade in mid-2018, with implementation by mid-2019.

"This is a very big step not only for Saudi but for the entire region, especially given Saudi’s size, depth and liquidity," said Rami Sidani, the head of frontier investments at the asset manager Schroders, adding the market could attract more than $50bn in passive and active flows. The Tadawul, as the Saudi stock exchange is known, is the Arabian Gulf’s largest equity market with a market capitalisation exceeding 1.6 trillion Saudi riyals. Foreigners owned about 4.3 per cent of the market by the end of June 15, according to the exchange. Saudi Arabia, which allowed foreigners direct access to stocks in June 2015, eased last year rules for them in a bid to attract more capital flows.

Saudi Arabia’s weighting in the MSCI index is expected to range between 2.5 and 3 per cent, a level that would be the highest for a Mena country. Brazil, for example, has a 6.85 per cent weighting in the index, according to MSCI data from May.

"[With the potential inclusion of Saudi Arabia] Mena as an asset class will have an important weight in emerging markets and EMEA," said Mohammad Hajj, the senior macro strategy analyst at Egyptian investment bank EFG Hermes.

"So for the first time the representation of Mena equities within the global EM space and EMEA space will be more in line with the actual universe."

The initial public offering of Saudi Aramco next year could also give Saudi Arabia a weighting of up to 5 per cent, said Mr Sidani.

The Capital Market Authority, the Tadawul’s regulator, has taken steps to increase its chances of inclusion in MSCI Emerging Market index as well as FTSE secondary EM index.

This year, the regulator changed the settlement cycle for listed shares to within working days, also known as T+two, from T+0, a reform that is expected to help it join MSCI emerging market index. "We are upbeat on Saudi getting added to the MSCI EM Watch List – this is despite recent market speculation that 6 weeks post T+2 inclusion was not enough time for MSCI to gauge institutional feedback," said M Nayal Khan, the head of institutional sales trading at Saudi Fransi Capital.

The other Mena markets in the MSCI index are Qatar and UAE, which were upgraded to emerging market status in 2014, and Egypt. Saudi Arabia, which is on a reform drive, plans to sell shares in Aramco and the Saudi stock exchange itself as it seeks to woo non-oil investments into the world’s biggest oil exporter.

To that end, last year it allowed foreigners with assets under management of at least 3.75bn Saudi riyals to participate in the stock market, down from 18.75bn riyals previously. The regulator has also doubled the limit for individual foreigners owning shares in a single company to 10 per cent.


The National

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