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Saudi Arabia – Your keys to the kingdom

The oil-rich Kingdom of Saudi Arabia has not historically been reliant on international investment to bolster its economy. However, when oil prices experienced a sustained low in 2015, Saudi Arabia’s fiscal deficit reached an all-time high.[1] In response, the Kingdom announced a national transformation plan called “Vision 2030,” which outlines a path to boost and diversify the Saudi Arabian economy and place its stock market more in line with international standards. FTSE Russell has been monitoring the Kingdom’s progress and is developing index solutions to address these changes.

The petroleum sector accounts for 42% of Saudi Arabia’s GDP and 90% of its export earnings.[2] It is the world’s second largest oil producer, and the world’s largest oil exporter.[3] [4]  Vision 2030 was introduced with the objectives of modernizing and diversifying the Saudi Arabian economy away from oil revenue, attracting foreign investors and privatizing government services.

Much of the Kingdom’s ability to succeed in diversifying its oil export-dependent economy relies heavily on its ability to attract foreign capital. It was not until June of 2015, that Qualified Foreign Investors (QFIs) could directly invest in the Saudi Arabian stock market (“Tadawul”), albeit with strict guidelines. In 2016, the QFI regulations were loosened, improving accessibility to foreign investors.

As a result of this series of economic reforms, it was announced in September 2015 that Saudi Arabia had been placed on FTSE Russell’s Watch List for inclusion in its global indexes (FTSE GEIS) as a Secondary Emerging market. If and when Saudi Arabia is included as a Secondary Emerging market, FTSE Russell provides a minimum of six months notice before the country will be reflected in its indexes. For those interested in monitoring the potential effect of this change in the interim, FTSE Russell has created the FTSE Saudi Arabia Inclusion Index Series.

The FTSE Saudi Arabia Inclusion Index Series contains country-level, regional and global indexes each combining the constituents of the FTSE Saudi Arabia Indexes with various FTSE indexes. The Gulf Cooperation Council (“GCC”) regional indexes below show that the inclusion of the relatively large Saudi Arabian economy could have a significant impact on the allocations of the other countries in the index.

On a larger scale, in the FTSE Emerging Saudi Arabia Inclusion Index, Saudi Arabia ranks tenth in size out of the 24 constituent countries with a weight of 2.6% as of August 31, 2017.

The FTSE Saudi Arabia Inclusion Index Series is, therefore, designed to help market participants prepare for the country’s potential inclusion as a Secondary Emerging market in the FTSE GEIS indexes and the impact this would have on emerging market allocations. As the Kingdom moves towards creating a more globally accessible market, indeed, this index series might be the keys to this kingdom.

For further detail, please see the FTSE Saudi Arabia Inclusion Index Series paper.

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[1] Source: https://www.mof.gov.sa

[2] Source: https://www.cia.gov/library/publications/the-world-factbook/geos/print_sa.html

[3] Source: https://bloomberg.com/news/articles/2017-02-20/russia-overtakes-saudi-arabia-as-world-s-largest-crude-producer

[4] Source: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2244rank.html 

[5] Weights are allowed to drift above 40% intra-rebalance.

 

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