Saudi Arabia well placed for MSCI upgrade: UBS

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Ali Janoudi

RIYADH – The Chief Investment Office of UBS, the world’s leading wealth manager, in a new report, has commended the Kingdom of Saudi Arabia for several reforms in the implementation of Vision 2030, including major enhancements to the accessibility of the Saudi Arabian equity market. MSCI's potential inclusion of the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index in 2019 would improve the attractiveness of a stock market that is similar in size to Russia's and which could account for up to 2.5% of MSCI Emerging Market Index.

In 2016, the Kingdom announced several regulatory changes to liberalize its stock market and bring it into line with international standards, with the goal of attracting both domestic and foreign investors. The reforms include raising the maximum foreign-ownership limit from 20% to 49%, lowering the minimum assets for Qualified Foreign Investors (QFI) to USD 1bn, and extending the settlement cycle to ‘T+2’. The extension was adopted this April in addition to the introduction of short selling, putting the index on track for the MSCI upgrade. These improvements led to MSCI's decision to include the MSCI Saudi Arabia Index in its 2018 Annual Market Classification Review for a potential inclusion in the MSCI Emerging Markets Index in 2019.

Analysts at UBS's Chief Investment Office predict that GDP growth for the economy will stabilize at around 1% this year. The Saudi riyal's (SR) peg to the US dollar is also expected to remain unchanged at SR3.75 per USD over the next 12 months.

“Despite the geopolitical situation, we expect the Kingdom’s economic growth to stabilize and its deficits to shrink,” said Ali Janoudi, Head of Wealth Management Central & Eastern Europe, Middle East and Africa at UBS and Vice Chairman of UBS Saudi Arabia. “Its consolidated fiscal position is a result of measured steps toward cutting expenditures and reducing oil dependence. Economic diversification will likely increase non-oil revenues and private-sector participation, and should benefit sectors like tourism, financials, mining, logistics, and healthcare. UBS will continue to support the Kingdom’s growth with its investment banking, asset and wealth management capabilities both globally and through UBS Saudi Arabia.”

Michael Bolliger, Head of Emerging Market Asset Allocation at UBS Wealth Management, added “the budget deficit for 2017 will narrow to the high-single-digit territory with the mobilization of additional non-oil revenues and the absence of further arrears payments. A lower interbank rate will help credit growth and support non-oil growth.”

An energy subsidy reform is likely to be implemented this year, along with the introduction of excise taxes on tobacco and sugary drinks. Early 2018 will see the introduction of a 5% value-added tax (VAT) and a likely levy on expatriates. Among key infrastructure projects, the Kingdom announced that it will build its largest cultural, sports and entertainment city in Al Qidiya. This follows other diversification initiatives such as the creation of Saudi Arabian Military Industries, a state-owned military industrial company. Better access to housing, which is among the goals set in National Transformation Program, will benefit sectors such as banks (mortgage demand), real estate developers and materials. Proceeds from the Aramco IPO will support public finances and help push the government’s economic diversification efforts, with receipts used to finance the fiscal gap and capitalize the Public Investment Fund.

However, renewed weakness in energy prices and a prolonged geopolitical crisis in the region could increase the risk premium for Saudi assets. Higher-than-expected rate hikes by the US Federal Reserve and lack of further privatization could also trigger uncertainty among foreign investors. — SG


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