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Tue 19 Jun 2018 10:53 PM

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MSCI's expected upgrade to see billions of infow to Saudi Arabia

Analysts believe that the move could lead to inflows of approximately $10 billion of passive inflows into the country.

MSCI's expected upgrade to see billions of infow to Saudi Arabia

Global index compiler MSCI is expected to reclassify Saudi Arabia as emerging market on Wednesday in a move that experts believe will lead to significant inflows of foreign capital and boost the kingdom’s economy.

If the decision takes place as expected, Saudi Arabia, with 32 stocks, will become the third-largest MSCI country from Europe, Africa or the Middle East, behind only South Africa and Russia.

In March, rival provider FTSE announced that it would upgrade Saudi Arabia to emerging market status, while S&P Dow Jones said in May that it was holding consultations with investors in a bid to determine whether it would do so as well.

Bassel Khatoun, managing director, Frontier and MENA for Franklin Templeton Emerging Markets equity, told Arabian Business that since being added to MSCI’s watch list in June 2017, “the Saudi Capital Markets Authority and Tadawul have continued to make substantial modifications to its equity market infrastructure and accessibility to ensure it meets the criteria for a potential upgrade.”

“It will indeed be a historic, milestone achievement for the kingdom’s equity market,” he added.

MR Raghu, the managing director of managing director of Marmore Mena Intelligence, a research house that focused on business in the MENA region, said that he expects Saudi Arabia to enter the market in several stages, beginning in March 2019 and ending in December 2019, to prevent Saudi Arabia’s large market size from destabilising other markets as funds shift money to Riyadh.

Raghu’s assessment was echoed in a recent report from Al Rajhi Capital, which said it believes that MSCI may upgrade Saudi Arabia in tranches, as any issues during the initial phase of trades can then be resolved by Saudi officials.

According to Raghu, Saudi Arabia is projected to have a weight of 2.7 percent in the index, with the possibility to rise to about 4.6 percent considering the proposed public offer of 5 percent of the shares of Saudi Aramco.

“The inclusion of Saudi Arabia in the FTSE and MSCI Emerging Market indices are likely to increase the flow of foreign funds in Saudi Arabia,” he said, added that MSCI classification is expected to result in approximately $10 billion of passive inflows into the country.

Commenting on the impact the reclassification would have on the fixed-income market, Abhishek Kumar, the managing director and sector head of emerging markets debt at State Street Global Advisors, said that a positive MSCI announcement “would make fixed income indices sit up and take notice.”

“Fixed income index providers have not yet made any announcement about index inclusion of Saudi Arabia’s domestic currency debt in the mainstream bond indices,” he said. “The availability of bond prices had been one of the main hurdles for index inclusion. However, with the listing of domestic bonds on Tadawul, regular prices for around a quarter of government debt issued in [Saudi Arabia] have become available.”

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