Saudi Arabia Likely To Be Classified As An Emerging Market, MSCI Says

The Middle East’s largest economy, Saudi Arabia, will likely be reclassified as an emerging market, The Wall Street Journal (WSJ) reported on Thursday.

Saudi Arabia’s $590 billion stock market will likely be reclassified as an emerging market following the opening of its stock market to foreign investors in June, the WSJ said, citing global index provider MSCI.

The kingdom of Saudi Arabia, which is one of the last major markets globally to restrict investment from abroad, earlier this week issued rules that are set to govern international investors that are looking to gain access to the some of the Arab state’s fastest-growing companies.

Global investors, who have been seeking higher returns and looking to diversify portfolios have shown a strong interest in the kingdom’s listed entities, which has thus pushed compilers such as MSCI to include Saudi Arabia into their global indices that are tracked by funds that manage billions of dollars.

“There is a lot of demand for MSCI to launch a Saudi index as soon as the market opens up to direct foreign investments,” said Sebastien Lieblich, a Geneva-based executive director of index research at MSCI, during an interview with The Wall Street Journal on Thursday.

Saudi Arabia, given the size of its market, will “most probably be classified as an emerging market” post review, Lieblich said.

Emerging Market or Frontier Market?

Ah, yes, the classification.  Saudi Arabia: an emerging market, or frontier market?

Uncertainty has circled the markets on how Saudi Arabia will be classified, once it qualifies to be elevated, since both of the benchmarks that are followed by funds have different mandates.

“The Saudi equity market is also too developed, relative to other such markets, to not be included in the EM basket,” Lieblich said.

It appears that the earliest that the Kingdom will be able to enter the realm of the emerging markets may be 2017, according to Lieblich.

The launch of Saudi Arabia’s market is planned for June 15, which is too close to make it into our June review list, he said noted.

However, the inclusion of the Kingdom will depend on the feedback we get from the investor community. “If there is demand, we could include it in the review list later in the year,” Lieblich said.

MSCI is planning to launch a Saudi index around the time of the market’s launch, he added.

The kingdom’s market opening to international investors is likely to draw in hundreds of millions in cash, which would boost the Saudi economy as it grapples with the lower oil prices, which is its main source of revenue.