Saudi Bourse `Optimistic' on Getting FTSE Emerging Market Tag

(Bloomberg) -- The head of Saudi Arabia's stock exchange says she's "very optimistic" that FTSE Russell will decide to add the kingdom to its list of emerging markets, a decision that could draw billions of dollars in passive funds to the country.

"The feedback we have heard from investors is positive," Sarah Al-Suhaimi, chairwoman of the bourse, known as Tadawul, said in an interview in New York on Tuesday. "They had certain concerns and we have addressed most of them, so generally we're optimistic."

FTSE Russell will announce a decision on whether it will include Saudi Arabia on its list of emerging markets countries on Wednesday, after markets close in the U.S. The Tadawul All Share Index has risen close to 10 percent this year, partially supported by bets that FTSE will grant the country the tag and that MSCI Inc. will follow suit in June. EFG-Hermes Holding estimates inflows of about $15 billion if the addition by both index compilers comes to pass.

Saudi officials are trying to attract more foreign investment to the once closed-off kingdom as part of Prince Mohammed bin Salman's plan to diversify the world's largest crude exporter away from oil. The 32-year-old heir to the throne is on a three-week tour of the U.S. with a delegation of hundreds of officials to burnish the nation's image and promote investment opportunities.

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So far, foreign interest in the Saudi stock market has been limited. Since the stock exchange opened up to direct foreign investment in 2015, investment from qualified foreign investors and through swaps has risen to about 1.5 percent of the market capitalization, Al-Suhaimi said. A positive decision from FTSE could draw about $3 billion of investment to Saudi Arabia, she estimated. It would have a potential weight of 2.4 percent in the index.

In September, FTSE refrained from promoting the country to secondary emerging market from unclassified status, saying that it would “soon" meet criteria to be included. Al-Suhaimi said Saudi officials have spoken to investors to "understand what's needed to change" and then "incorporated that feedback into our plans." She's "equally optimistic" on the emerging markets inclusion decision in June from MSCI, she said.

After a series of market overhauls including a shift to a T+2 settlement system from T+0 last year, Saudi Arabia's next big step is "establishing our clearing house that will allow us to have derivatives in the kingdom," Al-Suhaimi said. "We're working now on establishing the company and it should be launched by end of 2019, sometime in the second half.”

Inquiries from foreign investors to the stock exchange and regulator used to center around technical issues, but the concerns are now "longer-term in nature," she said, such as questions about the legal system and how it works. She expects "another wave" of interest and engagement with foreign investors if the FTSE decision Wednesday is positive, she said.

To contact the reporter on this story: Vivian Nereim in Riyadh at vnereim@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Rita Nazareth at rnazareth@bloomberg.net, Robert Jameson, Alec D.B. McCabe

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