Saudi market opening to have huge impact on region’s profile

|By TAP Staff| The Saudi decision to open up the stock market to foreigners could eventually lead to the Middle East North Africa region becoming as large as 5.2 percent of MSCI emerging markets benchmark.

The significance of the Saudi entry to the region’s profile is brought out by the fact that even after UAE and Qatar’s upgrade to emerging market status over a month ago, the region’s contribution to the benchmark index is just 1.2 percent. As against this, Saudi Arabia alone will contribute 4 percent.

According to Bank of America Merrill Lynch, Saudi could be granted the emerging market status by the middle of 2017, with MSCI starting the evaluation process by the middle of next year.

MSCI currently recognises Saudi via a domestic index with 45 constituents and $183 billion of free float market cap. The market already has 43 stocks traded by foreign investors via swaps.

Merrill Lynch says that with all but one stock having both a free float market cap above $1billion and trading more than $1million per day, there is ample scope for this index to qualify for EM status  The investment bank estimates that  depending on the number of stocks qualifying for EM inclusion, potential passive and active inflows could total anywhere between $13.3 billion and $26.6 billion. The MSCI Saudi index constituents currently trade $1billion per day.

The opening of the Tadawul to foreign investors also confirms the authorities’ focus on economic diversification and steady economic reforms, particularly in the housing and labor markets. Merrill Lynch says macroeconomic fundamentals remain robust and consumer and business confidence could be boosted by positive perceptions of the market opening. Increased foreign institutional investment is likely to help improve corporate governance, widen the pool of available savings and boost  forex reserves accumulation. The economy has weathered reasonably well the impact of the labour market reforms and we see growth hovering around 4%.