After adding China to its emerging market index this year, MSCI is now watching Saudi Arabia for possible inclusion to this index in 2018, based on the progress of various stock market reforms the country has implemented.
If the Middle Eastern country is added to the MSCI emerging market index, it would attract more investor interest. As growth in emerging markets rises, with the International Monetary Fund projecting a 4.5% growth rate for 2017, according to Tadawul, the Saudi Arabia stock exchange, more investors are likely to benchmark against emerging markets indices. And with Saudi Arabia garnering a potential 2.4% weight in the MSCI emerging markets index if this proposal goes through, more investors would need to have exposure to the country’s stock market.
“Saudi Arabia’s addition to the MSCI Watch List is an important milestone for Tadawul, and reflects the Kingdom’s significant progress in capital market reform in support of Vision 2030,” said Sarah Al Suhaimi, chairperson of Tadawul. “Potential inclusion in MSCI’s Emerging Market Index signals to international investors that the country’s capital market has attained greater maturity in terms of efficiency, governance, and regulatory framework.”
Saudi Arabia opened up its equity markets to direct foreign investment in 2015, and has been making market reforms since 2016. The improvements that MSCI sees in the Saudi Arabia stock market include:
- The raising of the cap for qualified foreign investor ownership from 20% to 49%
- Lowering of the assets under management criterion to be considered a qualified foreign investor from $5 billion to $1 billion
- The recognition of additional institutional investors such as sovereign wealth funds and university endowments as qualified foreign investors
- Simplifying the registration process for qualified foreign investors
- Changes to the exchange’s clearing and settlement process
- Accommodation of securities lending and short selling
To consider Saudi Arabia’s inclusion to its emerging market index, MSCI will weigh aspects such as:
- Whether the country’s opening up of its equity market to foreign investors is adequate to consider the change
- Should investors have more time to absorb the changes before the country’s addition to the index
- Are there any residual concerns about market accessibility
- The experiences of qualified foreign investors.