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Saudi Arabia targets 2017 MSCI emerging markets inclusion

[LONDON] Saudi Arabia, which allowed foreigners direct access to its equities for the first time on Monday, aims to be part of MSCI Inc's emerging markets index in 2017, according to the chief executive officer of the stock exchange.

"Joining MSCI's emerging markets index in 2017 is ultimately our target," Adel Al-Ghamdi said in an interview in London on Monday. "Once foreign investors have had a bit of experience interacting with the framework, they will provide sufficient feedback to MSCI." The kingdom's stock market is opening up as the nation diversifies its US$752 billion economy away from oil. Before today, investors from outside the six-nation Gulf Cooperation Council bought Saudi shares through equity swaps and exchange-traded funds. The Riyadh-based Capital Market Authority finalised new rules in May.

The earliest date that Saudi Arabia could be included in MSCI's emerging markets index is June 2017, Robert Ansari, executive director and head of client coverage team at MSCI in the Middle East, said in Riyadh in May. The index provider will seek feedback from foreign investors on the accessibility of the kingdom's market before adding the MSCI Saudi Arabia Index to its review list for potential inclusion in its emerging markets index, it said this month.

The new rules restrict direct trading to institutional investors with a minimum of about US$5 billion in assets under management and at least five years of experience. Holdings in a single equity for one qualified foreign investor are capped at 5 per cent, while QFIs holdings in a single stock is capped at 20 per cent. All in all, QFI holdings won't exceed 10 per cent of the whole market.

Foreigners - both resident and non-resident - will be able to own as much as 49 per cent of a single stock.

The rules "will evolve as we go forward," Mr Al-Ghamdi said. "Nothing is set in stone." Mr Al-Ghamdi expects the Arab world's biggest economy to post a budget deficit this year and probably in 2016. "It's potentially wise to fund that deficit through the issuance of a Saudi government development bond," he said.

Saudi Arabia will post a budget deficit equal to 20 per cent of economic output this year, as the government pursues spending plans in the face of an oil slump that has slashed revenue, the International Monetary Fund said. The kingdom has been burning through its reserves at a record pace to finance government expenditure.

The CMA plans to make the process of structuring bonds that comply with Islam's ban on interest easier, Mr Al-Ghamdi said last month. The kingdom's debt capital market needs improvement, he said.