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Abu Dhabi, UAETuesday 19 June 2018

Saudi economy year in review: Credit Suisse bullish on Tadawul upgrade potential

Kingdom's equity market likely to be included on global index providers MSCI and the FTSE emerging market gauges next year

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.

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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 mid-2014 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.

“There is a clear will in Saudi Arabia to get the economy ready for the future, which is going to be much more diversified than energy or fossil fuel production,” said Nannette Hechler-Fayd’herbe, the global head of Investment Strategy and Research at Credit Suisse Group.

On the macro front, Saudi Arabia’s economy contracted for a second quarter in a row in September as the kingdom grapples with lower oil revenues and is forced to cutback spending.

“It usually goes through a bit of ‘J-curve’, where initially, when reforms are getting actioned, there is a phase of slowing down, which is part of the processing and we have seen it in Europe,” Ms Hechler-Fayd’herbe said.

“But what really is the key, is how the economy is set, and how the components of economy are set up for diversification.”

She said the Arabian Gulf region’s core dependence at core on oil leads to cyclical exposures. Growth numbers in the region, according to her, will remain moderate and would not touch the historic highs.

“Growth numbers are going to remain lower if you have investment and trade propelled growth, but it is more stable growth,” she said.