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FTSE Russell promotes Saudi Arabia to secondary emerging market

FTSE Russell CEO Mark Makepeace said the pace of Saudi Arabia’s market reforms was commendable.

Saudi Arabia will be promoted to secondary emerging market status by FTSE Russell, reflecting the pace of change by the country's authorities to implement market reforms.

The index provider said Wednesday that Saudi Arabian stocks will be included in a "phased timeline" in the FTSE emerging markets indexes, starting in March 2019. Inclusion will be staged due to the "large projected size" of the country in the index, said a document outlining the decision by FTSE Russell. The country will account for about 2.7% of the emerging markets indexes. FTSE Emerging Markets indexes are part of the FTSE Global Equity Index Series and includes large- and midcap securities from advanced and secondary emerging markets.

The staged approach will help index trackers to "efficiently replicate the underlying benchmark change," with completion expected by December 2019.

The country will have a weighting in the FTSE Global All Cap index of about 0.25%.

FTSE Russell added that institutional investors requested modeling of the impact of the proposed initial public offering of Saudi Aramco on the index. The IPO has yet to be confirmed by authorities. However, in the event of a 5% listing on the country's stock exchange, Tadawul, Saudi Arabia's weighting would increase to 4.6% of the emerging markets index.

The promotion follows FTSE Russell's interim country classification review this month. The classifications are developed, advanced emerging, secondary emerging and frontier.

FTSE Russell said Saudi Arabia's market authorities have taken the required steps to implement reforms to its market, and the country now meets the formal requirements to be included in the emerging markets indexes. Changes cited by FTSE Russell include the introduction of enhancements to the country's independent custody model, as well as the further opening up of the capital market to qualified foreign investors.

"Saudi Arabia is to be congratulated on the pace of the recent market reforms, which are widely acknowledged as being positive for the country and capital markets development in the region," said Mark Makepeace, CEO at FTSE Russell, in a news release. "The demand from international investors for benchmark and analytic solutions to facilitate their investments into the Middle East region continues to grow."

Added Mohammed El-Kuwaiz, chairman of the Capital Markets Authority in Saudi Arabia: "As part of Saudi Arabia's Vision 2030, we are delighted to mark the country's inclusion in the FTSE Russell global benchmarks. We have worked closely with index providers and the global investment community to ensure that our capital market reform program sets the highest regulatory standards to meet the needs of both current and prospective investors. Saudi Arabia's inclusion in global benchmarks will further strengthen our position as the largest market in the Middle East region and we will work closely with the market during the transition period."

FTSE Russell said in its classification review last September that Kuwait met the requirements to be included as a secondary emerging market. Transition of the market to the index begins in September this year.

Index provider MSCI is also considering the reclassification of Saudi Arabia to emerging markets status from stand-alone market. It said any reclassification would be implemented in two steps, coinciding with a semi-annual index review in May 2019 and a quarterly index review in August 2019. MSCI is consulting with market participants on the proposal as part of its 2018 annual market classification review, with a decision to be announced in June.