A New Development in Saudi Arabia’s Reform Story as MSCI Delivers Upgrade

Index provider MSCI’s decision to include Saudi Arabia in its emerging-markets index will likely transform the Kingdom’s equity market, and potentially those across the Middle East and North Africa (MENA) region, according to Bassel Khatoun and Salah Shamma, Franklin Templeton Emerging Markets Equity. They weigh in on the implications they see for Saudi Arabia and the wider region of the MSCI announcement, which follows index provider FTSE’s reclassification in March.

MSCI’s decision to include Saudi Arabia in its emerging-market index recognizes the positive changes the country’s capital market has undergone over the last few years.

We think Saudi Arabia has an exciting growth story to tell, and we see a seat at the MSCI Emerging Market (EM) Index1 table as just reward for the improvements made to its equity market infrastructure, bringing it more in line with international standards.

Saudi Arabia’s emerging-market inclusion, which will take effect over two phases in May and August 2019, will likely transform the Kingdom’s capital market, and should have a positive impact on the wider Middle East and North Africa (MENA) region. We think it is the most significant reform story for emerging-market economies since China.

The speed of capital market reform in Saudi Arabia is impressive. The country’s Capital Markets Authority (CMA) and stock exchange (the Tadawul) have spearheaded the drive to modernize the Kingdom’s equity market infrastructure and accessibility for investors, by providing flexible ownership limits and introducing a two-day settlement cycle for trades.

The MSCI move follows FTSE Russell’s decision earlier this year to change Saudi Arabia’s stock-market classification to Secondary Emerging-Market status within the FTSE Russell Global Equity Index Series, effective March 2019.

Saudi Arabia’s Reform Story

With approximately US$9 billion in foreign investment already in the Kingdom’s stock exchange2, we think Saudi Arabia’s new emerging-market status is likely to bring significant foreign investment, which could, in the long term, trickle through to surrounding economies.

Improving economic fundamentals are also likely to lure investors. A mix of higher oil prices and lower deficits have resulted in more government spending, which in turn has increased non-oil gross domestic product (GDP)3 accelerated corporate earnings growth.