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Mon 29 May 2017 02:44 PM

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Saudi Arabia could get foreign investment windfall on MSCI move

Deutsche Bank sees Saudi inflows exceeding $35bn if it is added to MSCI’s emerging-markets index

Saudi Arabia could get foreign investment windfall on MSCI move
(PATRICK BAZ/AFP/Getty Images)

Saudi Arabia could attract tens of billions of dollars in foreign investments in the Arab world’s biggest stock market if it’s added to MSCI’s emerging-markets index, according to Deutsche Bank AG’s chief executive officer for the Middle East and Africa.

Our “research anticipates a figure of up to $35 billion of inflows,” Dubai-based Jamal Al Kishi said in an interview. “Given the recent developments in Saudi Arabia and the turmoil in some other emerging markets, Saudi Arabia could potentially attract more significant inflows in my view, but this will not be instantaneous.”

The world’s largest oil exporter allowed qualified institutional investors from outside Gulf Arab states to trade the kingdom’s stocks directly from June 2015. This year it moved to a T+2 settlement cycle as part of a drive to diversify its $640 billion economy away from oil.

Why has the response from investors been sluggish?

“Saudi Arabia has moved so fast since it announced its reform plans that it’s too ambitious to expect foreign institutional investors to have had the time to make a proper assessment of what is going on in the country. The amount of progress made by the Capital Market Authority in the last few months is equivalent to years of progress in other jurisdictions.”

“Fund managers are saying: We are not even set up. We haven’t even done the homework that we needed to do on the Saudi market, equities, fixed income, financial markets, liquidity and taxation.”

How has the pace of reform impacted investors?

“Emerging-markets investors have been busy. Pakistan has just been upgraded, Russia, South Africa and Turkey have faced periods of extended volatility. Saudi Arabia is a huge market with a reputation for being less agile -- then all of a sudden Saudi is moving at a head-spinning pace.”

“So, yes you can be disappointed with the response, but you have to bear in mind that Saudi Arabia has moved very, very rapidly for the market to keep up.”

What will happen if Saudi Arabia is added to the MSCI index?

“You are beginning to see a gradual inflow now. You are beginning to see inquiries, it’s happening as we speak. From June depending on the announcements by the MSCI, we could find ourselves inundated if Saudi were to accede to the MSCI Index by, say, June 2018. That would take us to a completely different plateau in terms of international investors’ interest in the country.”

What is needed to improve foreign investments?

“We definitely could do a lot of things to improve the landscape for incoming capital from abroad. The more transparency in the regulatory and legal frameworks, the more clarity we shed on the legal rights and obligations of counterparties in the Saudi economy and the more convincing we appear about protecting the rights of foreign investors.”

“The freedom of movement and repatriation of capital has always been a sacrosanct issue for Saudi Arabia. These will also help.”

Is the regulator doing enough?

“In all fairness, I must give the CMA credit. They are welcoming input and they are saying we will give all sorts of ideas and feedback due consideration. Broadly speaking, I am very optimistic that there is genuine desire in Saudi Arabia that flows from the very top to do what is needed to attract foreign capital.”