Saudi Arabia’s upgrade to emerging markets opens the floodgates for foreign funds
After upgrading the UAE to an “emerging markets” status by the index compiler MSCI, it now seems that it’s Saudi Arabia’s turn to move up to the same level, which, when it happens will boost confidence in the Gulf’s financial markets and open up opportunities to draw in foreign capital thanks to the greater transparency of their dealings.
It is fairly well known that Gulf stock exchanges are among the most modern in terms of deployed technology and processes. Although the oldest among them does not exceed four decades, they have rapidly developed thanks to many factors.
A prime reason is the availability of high liquidity, particularly after the doubling in oil prices during the mid-1970s and the establishment of joint-stock companies such as the Saudi Arabia’s Sabic, the world’s third largest petrochemical company, as well as offering shares in Gulf banks through public subscriptions. These transformed local markets into a global investment destination.
Although in the beginning the initial public offering were limited to citizens — due to some restrictions and a reluctance for foreign shareholding — the results achieved by the Gulf’s publicly traded entities were remarkable. They eventually became a strong pull factor for foreign investments, which led to more regulations to continue the development of still nascent markets. This is indeed what happened and led them to be upgraded by the MSCI.
Earlier, there have been observations by foreign companies about a lack of regulation and transparency but these matters were taken into consideration when the Gulf markets planned to join the index of emerging markets. Substantial changes have since occurred, leading to the listing of the Gulf financial markets under the umbrella of MSCI.
The UAE market has indeed benefited from being upgraded to emerging market status and continues to attract foreign funds. This in turn has led to a global character for its stock exchanges as well as encouraged new joint-stock companies to come into being, with participation by foreign shareholders in some cases.
The market cap has increased, contributing to stability and curbing sharp fluctuations, all of which are positives that resulted from being upgraded by MSCI.
So with Saudi Arabia set for an upgrade, financial flows worth $9 billion (Dh33.06 billion) are expected to result. Although this amount is modest compared to the volume of the Saudi market — the largest Arab financial market — it is just the beginning of a significant attraction of investments, and coinciding with Aramco’s sale of 5 per cent through an IPO next year. It will lead to a listing on the Saudi market alongside other key international bourses.
In a sign of things to come, the Saudi market index gained 4 per cent in one day following the confirmation of joining MSCI. The volume of trading amounted to SR10 billion (Dh9.79 billion), a level achieved for the first time since 2015.
Saudi Arabia’s joining in the MSCI watch list will result in more reforms for the markets and provide an opportunity to further boost their systems and regulations. It will also lend them further power and flexibility to face fluctuations and curb speculations with even more transparency. The end goal is to be ranked alongside the advanced markets, which seems a perfectly logical step.
And as the common Gulf market had achieved some remarkable progress and integration and opened up new scope for dealing in all Gulf financial markets, the other GCC stock markets (Kuwait, Bahrain and Oman) can also strive to join MSCI through meeting the necessary requirements. In fact, the Kuwaiti market is the oldest among Gulf bourses.
The GCC markets are now about to embark on a new phase, which would result in a paradigm shift that would make them one of the most influential emerging markets. It will also open the way for them to transform further and in which global financial institutions would have active participation.
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