I’m sure most of you have heard of the upgrade of the MSCI EM for Saudi Arabia, but did you really what it is, what it measures and why everything the world waited impatiently?
The MSCI Emerging Markets Index is one of the most popular index created by Morgan Stanley Capital International (MSCI), designed to measure equity market performance in global emerging markets. This is a market capitalization index composed of float-adjusted index of 23 emerging economies.
The Tadawul index of Saudi Arabia is not only the largest stock market in the region, but also one of the most diverse, consisting of nearly 180 titles in various areas, which makes it more representative of the economy real than its regional peers.
As part of its reform of the capital market, the Saudi capital market authority (CMA) opened its stock market to foreign direct investment in June 2015, as part of a qualified foreign investor program (QFI) . For easier access, this progamme is reduced by $ 1 billion under management QFI minimum assets of 500 million and has added new types of eligible private equity funds, such as sovereign wealth funds and endowments academics.
To attract more foreign investors, foreign ownership limits were raised from 20 to 49% since September 2016. To further align the Saudi capital markets to international standards and to increase transparency and liquidity, the country moved to a settlement cycle T + 2 from T + 0 for all listed securities and also introduced the borrowing and lending of securities and covered short sales.
In recognition of the reforms of the capital market in Saudi Arabia and continuous improvements, MSCI announced that it would consider the MSCI Saudi Arabia for inclusion in the MSCI Emerging Markets Index and should communicate its decision Wednesday, June 20, 2018 .
But that could mean potential inclusion for Saudi Arabia? This upgrade will greatly benefit our country in many ways. The most direct benefit is the increase in capital inflows. The MSCI EM assets valued at $ 1.9 trillion. The inclusion in the index will not only increase the exposure of Saudi shares to international investors, but also result in passive capital inflows by funds that would follow his progress.
The Saudi central bank (SAMA) issued last year a series of measures to address the lack of liquidity, including the updating of lending rates. Although the picture has improved, he fell at the end of the first quarter of this year, reducing the ability of banks to lend money. Capital inflows with MSCI registration will greatly increase the liquidity in the economy. In addition, the inclusion will increase trade volumes by reducing the risk premium on the shares and thus will attract new investors worldwide.
I believe that the growing importance of Saudi Arabia on the world scene will undoubtedly help to diversify the base of its investors and sources of capital, and to open its market to major foreign institutional investors who have been so far relatively small.
MK Basil Al-Ghalayini is the president and CEO of BMG Financial Group.