The upgrade of the Saudi Arabia to Emerging Market status by index compiler MSCI has been a long time coming.
Saudi Arabia has been on MSCI’s review list for the past 12 months and, following a similar promotion in March by the FTSE Russell Global Equity Index, confirmation of the MSCI upgrade on 20 June was expected.
Nonetheless, it is a significant step forward for the kingdom’s Vision 2030 reform programme.
The opening up of the Saudi market and the Saudi Stock Exchange (Tadawul) to foreign investors is central to Vision 2030, and Riyadh expects the Tadawul to be one of the primary gateways for foreign investors into Saudi Arabia.
Being classified as an emerging market guarantees an increase in volumes of passive capital into the market from institutional investors.
Of greater structural significance, the upgrade is evidence that the kingdom meets the high standards of corporate governance and transparency that are required and that ease of trading has improved.
The Tadawul and Saudi Arabia’s Capital Markets Authority have rolled out a succession of market reforms over the past 18 months aimed at improving corporate transparency and reporting standards in the kingdom, and introducing new regulations to open up the market to foreign investors.
These reforms will increase investor confidence in the Saudi corporate sector and improve opportunities for companies, particularly new entities and start ups, to raise capital through initial public offerings (IPOs) and share offerings.
The elevation could not come at a better time for the region’s equity markets, which have been struggling with very low trading volumes as a result of sluggish economic growth forecasts for the region and a lack of IPO activity.
It also adds some momentum to the much-heralded plans by the kingdom’s national oil company Saudi Aramco to float up to five per cent of its equity on the Tadawul, which Riyadh hopes will raise up to $100bn for the kingdom, and which potentially could be the biggest IPO in history.
The upgrade will also facilitate Saudi Arabia’s plans to privatise state assets such as the Saudi Electricity Company and float them on the Tadawul.
Riyadh needs to make sure that it is making the most of the opportunity presented by the Tadawul upgrade by pushing ahead with its Vision 2030 privatisation plans.
It takes time to deliver a highly complex privatisation process and credibility is essential. It is important therefore to avoid making mistakes.
It is two years since the Vision 2030 reform programme was launched and there have yet to be any significant privatisations brought through the stock market.
With oil prices rising, some of the fiscal pressures driving the reforms have eased and there are concerns being raised about the process losing momentum.
The MSCI upgrade is an opportunity to address these concerns.