Saudi Arabia is on track to be included in the MSCI Emerging Markets Index, following major reforms, wealth management firm UBS has said.
Last month, MSCI announced the addition of Saudi Arabia to the 2018 annual review cycle for potential inclusion in the MSCI Emerging Markets index the following year. If it was included it could be the ninth largest country listed on the index, potentially accounting for up to 2.5 percent of the index.
UBS said inclusion would improve the attractiveness of the Saudi stock market, the Tadawul, bringing billions of dollars in foreign inflows.
The attention from MSCI follows several regulatory changes in 2016 to liberalise its stock market and bring it into line with international standards to help boost both domestic and foreign investment.
The reforms include raising the maximum foreign-ownership limit from 20 percent to 49 percent, lowering the minimum assets for Qualified Foreign Investors (QFI) to $1bn (which still limits investment to institutional investors), and extending the settlement cycle to ‘T+2’. In April, the Tadawul introduced short selling, which further enhanced its appeal.
In addition, analysts at UBS's Chief Investment Office predict Saudi GDP growth will stabilise at about 1 percent this year, while the Saudi riyal's peg to the US dollar is also expected to remain unchanged at SAR 3.75 per dollar over the next 12 months.
UBS Wealth Management head of emerging market asset allocation Michael Bolliger said the kingdom’s budget would strengthen this year.
“The budget deficit for 2017 will narrow to the high-single-digit territory with the mobilisation of additional non-oil revenues and the absence of further arrears payments,” he said.
Proceeds from the expected Aramco initial public offering next year also would support public finances and help push the government’s economic diversification efforts, with receipts used to finance the fiscal gap and capitalise the Public Investment Fund, UBS said.
However, renewed weakness in energy prices and a prolonged geopolitical crisis in the region could increase the risk premium for Saudi assets. Higher-than-expected rate hikes by the US Federal Reserve and lack of further privatisation could also trigger uncertainty among foreign investors, the firm said.
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