A momentous year in the history of Saudi Arabia

Credit Suisse is bullish on the prospects of Saudi Arabia’s 1.66 trillion Saudi riyal (Dh1.62tn) equity market getting approvals of global index providers MSCI and the FTSE for inclusion next year, and expects inflow of around US$9 billion into Saudi equities by the MSCI upgrade alone.

“We have been bullish primarily because of Saudi Arabia’s potential for an upgrade to emerging markets status next year,” said Fahd Iqbal, the head of the bank’s Middle East research. “We do feel strongly that Saudi will get the nod from both. The scale of inflow that would be triggered by Saudi’s inclusion will be tremendous and it will far outweigh what we have seen in Qatar and UAE [on their inclusion]. It is $9bn [ballpark figure] of inflows just by the inclusion in MSCI.”

FTSE Russell, which upgraded Kuwait and kept Saudi Arabia out of its emerging market index in September, will reassess the kingdom in March for inclusion. The MSCI, whose emerging markets gauge is tracked by about $2 trillion in active and passive funds, will announce its decision on including Saudi Arabia in June 2018. If successful, dozens of Saudi stocks would become part of both indexes.

“[MSCI] index weight we know would be 2.5 per cent which is quite sizeable, but the question is what will be the reaction of investors. The active investors, how much of their allocations would they fill,” Mr Iqbal said.

The Saudi Stock Exchange (Tadawul), is the biggest stock market in the Arab world. It opened doors to foreign investors in 2015 and has gone through radical operational and regulatory transformations, which have made it a potential candidate for an upgrade to emerging market status.

Currently, only qualified foreign investors are allowed to invest in Saudi stocks. However, their investments account for less than 1 per cent of the total market capitalisation.

Mr Iqbal said the limited foreign investment is primarily due to the Saudi history of not allowing any foreign investments. “They have been very restrictive about it and the fact that it wasn’t even a frontier market index means that nobody touched it,” he said.

Saudi Arabia, which is Opec’s biggest oil producer, relies heavily on the sale of hydrocarbons for revenues. The fall in crude prices from the mid2014 peak of $115 a barrel peak has forced the country to seek alternative revenue lines and Riyadh is currently implementing its economic and social reform agenda under the Vision 2030 programme.

Privatisation is at the heart of the country’s efforts to wean its economy off oil and it is encouraging foreign investments in both government and private sector companies.

Next year, the kingdom plans to part-privatise Saudi Aramco through a listing, probably the biggest-ever share sale in history. With a potential valuation of $2tn, the sale of less than 5 per cent of Aramco may generate $100bn for the government.