Saudi Arabia gains emerging market status from FTSE Russell

29 March 2018
Tadawul will join the secondary emerging market index in 2019

Saudi Arabia has been upgraded to ‘secondary emerging’ status in the FTSE Russell Global Equity Index Series.

The kingdom had been registered as ‘unclassified’ since it was added to the FTSE Russell watch list in 2015. Saudi Arabia’s upgrade to secondary emerging status follows a number of reforms introduced by the Tadawul (Saudi Stock Exchange) and Capital Market Authority (CMA) over the past two years. Reforms have included allowing foreign institutional investors to directly buy shares in initial public offerings (IPOs).

The Saudi stock market, which has a capitalisation of almost $500bn, will join the secondary emerging market index in stages between March and December 2019. Inclusion on the index may attract billions of dollars of new foreign portfolio investments to the kingdom's stock market.

“FTSE’s announcement today is significant for Tadawul in that it indicates growing investor confidence in the Saudi capital market and recognition that we are among the largest and most liquid emerging markets in the world,” said Khalid al-Hussan, CEO of Tadawul, in a statement. “Guided by Vision 2030, we remain steadfast in our commitment to the reforms already introduced and in the pipeline so that we may continue to grow investor confidence worldwide and further strengthen the Saudi market.”

Saudi Arabia is hoping to be granted inclusion in the Morgan Stanley Capital International (MSCI) index. The Tadawul will be assessed for possible inclusion in the MSCI index in June. It was included in MSCI’s watch list in June 2017.

In January, the Tadawul announced a series of market reforms aimed at attracting international investment and supporting its efforts to achieve emerging market status.

The measures, which included the introduction of a market-making programme and steps to allow asset managers to aggregate orders, were intended to improve market access and efficiency, enhance liquidity, bolster investor security, mitigate risk and further align market practices with global best practices.

Foreign ownership of Saudi stocks is among the lowest across all emerging markets, and inclusion on the MSCI Emerging Markets Index would significantly boost foreign participation in the Saudi market, with some analysts forecasting that passive investors will buy $10bn-$12bn of Saudi equities as a result of the upgrade, while active investors will invest a further $30bn-$35bn.

The Tadawul will play a central role in the planned IPO of part of Saudi Aramco. The planned sale of up to 5 per cent of shares in the world’s largest oil company could raise up to $100bn for the kingdom.

Riyadh had been planning to launch a dual-listing of Saudi Aramco in 2018, with a local listing supplementing a listing on a major international stock market, such as New York or London. However, a recent report in the Wall Street Journal speculated that Aramco will list solely on the Tadawul in 2019, while Riyadh evaluates the benefits of listing on an international venue. According to the report, the decision to list solely on the local exchange is due to concerns about legal risks and also because the requirement for a bigger listing has become less important due to rising oil prices.

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