MSCI MSCI Inc

By Nicolas Parasie 

Saudi Arabia's economy is set to draw tens of billions of dollars in foreign investment after gaining recognition Wednesday as an emerging market from index compiler MSCI Inc., a vote of confidence for the domestic stock exchange ahead of the Aramco IPO.

Saudi Arabia will be added to MSCI's emerging market index next year in two stages, joining a group of countries including Russia and China. Many of the world's largest fund managers benchmark themselves against index compilers and will automatically invest in Saudi stocks following the upgrade. With a market capitalization of around $520 billion, the Tadawul, as the bourse is locally named, is the Arab world's largest stock market.

MSCI said Riyadh would have a weight of 2.6% in the emerging market index. That could eventually rise if Saudi Arabia goes ahead with the initial public offering of state-owned energy Saudi Arabian Oil Co. on the local exchange. If it goes forward, the IPO of Aramco, as the company is known, is expected to be the most valuable ever.

Ehsan Khoman, head of research for the Middle East at Bank of Tokyo-Mitsubishi, estimates that up to $40 billion of fresh foreign inflows would be channeled into Saudi Arabia's stock market in the next year.

"People will realize Saudi Arabia is becoming a more sophisticated financial player, this will open doors to other parts of the economy," Mr. Khoman said.

The road toward the MSCI upgrade began in 2015 when Saudi Arabia for the first time opened its stock market to direct foreign investments. The Tadawul and its regulators have developed a rapid series of changes designed to bring its technology in line with international standards and to court more overseas investors.

While the MSCI designation isn't related to the Aramco IPO expected later this year or next, it represented a stamp of approval for those changes.

In March, rival index compiler FTSE Russell said it would also classify Saudi Arabia as an emerging market.

The Saudi stock market closed flat on Wednesday ahead of the MSCI decision, after having risen 16% since the start of the year.

The inclusion of the kingdom comes as efforts to transform Saudi Arabia's oil-dependent economy have had mixed success. Foreign direct investment fell to a 14-year low of $1.4 billion in 2017 from an average $18.2 billion in the years 2005 to 2007, recent United Nations numbers show, while unemployment remains high. Foreign interest in Saudi stocks also remained underwhelming, at about 5%, despite the changes that were introduced.

Saudi Arabia, as its oil-exporting neighbors in the Persian Gulf, in recent years was forced to introduce some drastic and often painful reforms, such as reducing energy subsidies, to manage the impact of the sharp drop in oil revenues. The country's goal is to make the economy less reliant on the state's oil largess by promoting the private sector and to create sufficient jobs for a fast-growing population.

The reforms, which go hand in hand with cultural and domestic changes such as allowing women to drive, are overseen by the country's crown prince Mohammed bin Salman. Some of his actions, most notably the arrest of dozens of businessmen and officials in November in what the government said was an anticorruption drive, have raised concerns among foreign investors.

Write to Nicolas Parasie at nicolas.parasie@wsj.com

(END) Dow Jones Newswires

June 20, 2018 18:47 ET (22:47 GMT)

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