Why Saudis' MSCI Bid Matters And What They've Done to Get It

  • Country could be included in MSCI’s review list in June
  • Market capitalization has fallen about $140 billion in 2 years

Saudi Arabia wants foreign money, and it’s been overhauling one of the world’s most conservative financial markets to get it.

Thursday marks the second anniversary of the kingdom’s decision to allow money managers outside the Gulf to trade Saudi shares directly. Since that announcement, authorities have relaxed the guidelines even more, yet total foreign ownership has languished at about 5 percent, and the equity market’s capitalization has fallen by about $140 billion in two years to $439 billion.

As part of its plan to revamp the economy and reduce dependence on oil revenue, Saudi Arabia is now seeking inclusion in MSCI Inc.’s emerging-market gauge. A decision from MSCI on whether the kingdom is on the index provider’s review list is due next month.

What has Saudi Arabia done to open its market?

In the changes brought in on May 4, 2015, Saudi Arabia said it would allow Qualified Foreign Investors with a minimum of five years’ experience and 18.75 billion riyals ($5 billion) of assets under management to apply for licenses to trade equities directly. The regulator set a 5 percent limit for a single QFI in a company, and a 20 percent ceiling for QFI holdings in a single stock.

Since then, the authorities reduced the asset-under-management requirement to $1 billion, and raised the single-stock limit to 10 percent.

And last month, the exchange shifted the settlement cycle to two days -- so-called T+2 -- allowing traders to complete the transfer of funds within 48 hours rather than the same day, bringing the exchange in line with international peers. It also introduced short selling.

Read More: Short Selling Makes Quiet Start in Middle East After Saudi Debut

The number of QFIs has risen to 60, and will probably rise further because of the shift to T+2, said Mohammed El-Kuwaiz, the vice chairman at Saudi Arabia’s Capital Market Authority.

Why all the changes now?

The collapse in crude prices has brought financial strain to Saudi Arabia. The kingdom’s foreign assets have tumbled by $236 billion since reaching a record $737 billion in August 2014, while the budget deficit swelled in 2015 to the widest in almost a quarter century.

To reduce the kingdom’s dependency on oil, Saudi Arabia announced last year the so-called Vision 2030, spearheaded by Deputy Crown Prince Mohammed bin Salman. The program includes plans to sell shares in state companies and curb spending on subsidies and wages.

Saudi Arabian Oil Co., the oil giant better known as Aramco, is earmarked for what could be the world’s biggest initial public offering next year.

Have the changes boosted the market?

Not really. The market changes coincided with the government’s austerity measures, which have diminished demand for Saudi stocks. The Tadawul All Share Index has fallen about 30 percent in the past two years. QFI ownership is languishing at 0.3 percent, and foreigners own a total of about 4 percent of Saudi shares.

So what’s next for MSCI Inclusion?

The Saudi Stock Exchange (Tadawul) Chief Executive Officer Khalid Abdullah Al Hussan says the bourse has met all the criteria to be considered for MSCI’s gauge, and there are now enough QFIs to give the index provider feedback on the investment process. Excluding Aramco, the country is expected to account for 2.82 percent of the MSCI EM Index, according to EFG-Hermes Holding SAE.

The kingdom has been on FTSE Russell’s Watch List since September 2015. It will be reviewed for inclusion in its FTSE Global Equity Index Series as a Secondary Emerging market in September 2017.

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