Saudi Arabia set to win MSCI emerging market status in June, says EFG Hermes

Kuwait is likely to also be included in the index following reforms

Index provider MSCI will make a decision in June 2018 on whether to upgrade Saudi Arabia and Kuwait to emerging market status. Saudi has a 100 per cent probability of winning an inclusion, according to EFG Hermes. Bloomberg
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Saudi Arabia has a 100 per cent probability of being included in the MSCI’s emerging market index next month, after the kingdom was put on a watchlist for inclusion last year, according to investment bank EFG Hermes.

“We see no reason why MSCI would not upgrade Saudi Arabia to emerging markets status this June,” the analysis on Sunday said.

Index compiler MSCI is expected to announce a decision on whether to upgrade Saudi stocks to EM (emerging market) status next month, a move that would help the country attract billions of dollars into the Middle East and North Africa (Mena)’s biggest stock exchange, which has a market capitalisation of $500 billion.

The promotion would follow a similar move by index compiler FTSE Russell in March, and be a second achievement for the kingdom, which has been implementing a series of reforms to develop its capital markets in line with its Vision 2030 economic diversification strategy.


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EFG Hermes said on Sunday the earlier FTSE decision means MSCI will be able to observe two tranches of FTSE implementation, “giving them comfort that any hiccups observed” during those trades would be addressed by the relevant Saudi authorities.

“The MSCI May 2018 trade is around $36bn (two-way flows), meaning that a Saudi upgrade is manageable in two tranches,” the bank said.

Kuwait, which is also vying to diversify its economy and reduce its reliance on oil, should also be upgraded to emerging market status this June on the back of reforms undertaken by the Kuwait stock exchange, EFG Hermes added. The country has a 75 per cent chance of inclusion.

The reforms implemented by Boursa Kuwait in the first half of 2017 and full year to date, "warrant a watch list addition this June for a possible upgrade to EM status,” EFG Hermes said. “Kuwait would easily meet EM requirements for size and liquidity for three stocks (bare minimum) if tested as new constituents, and if the current index is maintained using EM requirements, we would end up with eight constituents, 0.4 per cent of MSCI EM and around $1.7bn of inflows.”

Though Boursa Kuwait was the first stock exchange in the region, the country has struggled to modernise its economy following conflict with Iraq in the 1990s. It fell into deficit in 2015 for the first time since 1999, prompting the government to launch a series of reforms including its far-reaching Kuwait 2035 economic diversification strategy last January.

The strategy aims to increase private sector involvement in the national economy and attract higher levels of foreign investment across a range of sectors and in the capital markets.

The Kuwait stock exchange itself is preparing for its own initial public offering in the first quarter of 2019 amid a pick-up in equity capital market deals and a privatisation push by regional governments.