S&P Dow Jones considers emerging market status for Tadawul

S&P Dow Jones Indices (S&P DJI) on Wednesday said it has begun consulting investors for a potential upgrade for Saudi Arabia to emerging market status.

"S&P DJI is considering changing the country classification of Saudi Arabia to reflect the progress made with regard to financial market reforms including greater foreign accessibility and alignment with global standards," the equity index compiler added.

While it has been considering a Saudi upgrade for several years but decided against it in 2017 because of limited market access for foreign investors. At present, the Kingdom is ranked as a “stand-alone country”.

Over the last year, the Capital Market Authority and Saudi Stock Exchange (Tadawul), have made some key changes to market regulations in order to facilitate foreign investment.

These changes include minimum assets under management for QFI reduced to $500 million; individual foreign ownership limit for QFI increased to 10 percent; improvement of independent custody rules; accounting required to follow IFRS standards; trade settlement cycle changed to T+2; expected implementation of a reliable price auction process by the second half of 2018 and announcement of plans for a central counterparty clearinghouse (CCP) fully operational by the second half of 2019.

“All of these reforms are expected to support the continuing trend of market liberalization, foreign investor accessibility, and alignment with global standards,” S&P DJI noted.

“In addition, the anticipated initial public offering of Saudi Aramco has drawn significant foreign investor interest. All of these developments reinforce the need to appropriately reflect the status of Saudi Arabia in global investment portfolios," it added.

S&P Dow Jones estimates Saudi Arabia could ultimately have a 2.57 percent weighting in its emerging benchmark index.

An upgrade is likely to draw more foreign money to the Tadawul, though the inflow will be less than the estimated from similar upgrades by FTSE Russell and MSCI, fund managers told Reuters.

In March, FTSE Russell decided to add Tadawul to its emerging market index starting March 2019, which could attract about $5 billion of passive inflow.

MSCI will decide whether to take the same action next month, which could attract around $10 billion in passive funds.