Saudi Arabia's emerging market upgrade explained

Tadawul Index is region’s largest equities market, also one of the most diverse, consisting of close to 180 stocks across a range of sectors

  
An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia. Image used for illustrative purpose.

An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia. Image used for illustrative purpose.

REUTERS/Faisal Al Nasser

I am sure most of you have already heard about the MSCI EM upgrade for Saudi Arabia, but do you actually know what is it really, what does it measure and why all the people have been eagerly waiting for it?

The MSCI Emerging Markets Index is one of the most popular indices created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 23 emerging economies.

Saudi Arabia’s Tadawul Index is not only the region’s largest equities market, but also one of the most diverse, consisting of close to 180 stocks across a range of sectors making it more representative of the real economy compared with regional peers.

As part of its capital market reforms, the Saudi Capital Market Authority (CMA) has opened its equity markets to foreign direct investments in June 2015 through a Qualified Foreign Investor (QFI) program. To make access easier, it reduced the minimum assets under management for QFIs to $500 million from $1 billion and added new types of eligible QFIs, such as sovereign wealth funds and university endowments.

To attract more foreign investors, foreign ownership limits have been raised from 20 percent to 49 percent since September 2016. To further align Saudi Arabia’s capital markets with international standards and to increase transparency and liquidity, the country transitioned to a T+2 settlement cycle, from T+0, for all listed securities and also introduced securities borrowing and lending and covered short selling.

In recognition of Saudi Arabia’s capital market reforms and continued enhancements, MSCI announced it would consider the MSCI Saudi Arabia Index for inclusion in the MSCI Emerging Markets Index, and is expected to communicate its decision on Wednesday 20th June 2018.

But what could potential inclusion mean for Saudi Arabia? Such upgrade will greatly benefit our country in many aspects. The most direct benefit is increased capital inflows. The MSCI EM Index has $1.9 trillion worth of assets benchmarked against it. Inclusion on the index would not only increase the exposure of Saudi stocks to international investors, but also will lead to passive inflows from funds that follow its progress.

The Saudi Central Bank (SAMA) last year issued series of measures to address the lack of liquidity, including discounting lending rates. While the picture has improved, it had slid back by the end of Q1 this year, reducing the ability of banks to lend money. Capital inflows with an MSCI listing will substantially boost liquidity in the economy.

Moreover, the inclusion will increase trading volumes by reducing the equity risk premium and so draw in new investors from around the world.

I believe that Saudi Arabia’s growing importance on the world stage will undoubtedly help it to diversify its investors’ base and capital sources, as well as open its market to large institutional foreign investors which have so far been relatively restricted.

Basil M.K. Al-Ghalayini is the Chairman and CEO of BMG Financial Group.

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