Saudi Arabia reaps $53bn dividend from emerging market status

Saudi Arabia and the broader GCC region are tapping into emerging markets in more ways than one. (Shutterstock)
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Updated 21 February 2020

Saudi Arabia reaps $53bn dividend from emerging market status

  • The country finalized its entry into the JP Morgan suite of emerging market (EM) indices

In September 2019, Saudi Arabia reached an important milestone in its Saudi Vision 2030 reform plan, which aims to diversify the Kingdom’s economy away from its petrochemical revenue base.
The country finalized its entry into the JP Morgan suite of emerging market (EM) indices. It was the finale in a series of announcements by the major indexes, including MSCI, S&P and FTSE, confirming that Saudi Arabia met their inclusion criteria.
This is a testimony to the work of The Capital Markets Authority and Saudi Arabia’s stock exchange, Tadawul, which have driven the effort to modernize the Kingdom’s capital markets infrastructure and make it more investor friendly.
Saudi’s inclusion as an EM allows its entry to ETF’s, opening the country to billions of dollars-worth of outside investment, which would be otherwise closed to it.
An example, $1.9 trillion tracks the MSCI EM Index alone of which 80 percent is active and 20 percent passive. Given this, Saudi Arabia’s 2.8 percent country weighting represents an additional $53 billion in foreign capital flows to the country.
Looking into 2020, there are several considerations investors should bear in mind. Foremost among these are oil prices and a concurrent slowdown in growth, regional geopolitical tensions and — a potential boon for investors — the rise of fintech in the region.
Oil prices have swung between $55 and $75 a barrel this year against a backdrop of slowing global growth, trade tensions and geopolitical risks. Steep oil production cuts — undertaken in a bid to push up prices — have acted as a further drag on growth, in addition to weak external demand.
As a result, Saudi gross domestic product (GDP) growth is forecast to slow from 2.4% percent in 2018 to 0.2 percent this year. Across the GCC as a whole, GDP is expected to decelerate to 0.7 percent from 2 percent in 2018.
The region’s volatile geopolitics was highlighted in September when drone attacks targeted Saudi Arabia’s oil industry. Indeed, a recent “Future of Wealth” report by UBS, which canvassed investor opinion from around the world found that 83 percent of investors in the UAE), one of the GCC’s six members, think geopolitics is driving markets more than business fundamentals.
Despite the challenging geopolitical backdrop, globally, investors in the UAE are most optimistic about returns in the next decade: 85 percent versus 69 percent in the US, 65 percent in Asia and 72 percent in EMEA.
A potential bright spot for GCC investors heading into 2020 is the rise of the technology sector. Global groups, including Amazon, which chose Bahrain to launch its first data hub in the region, are flocking to service the region’s youthful, tech-savvy populations.
The development of a financial technology ecosystem is also a significant component of Saudi Arabia’s Vision 2030 economic diversification strategy. It is seen as essential for broadening the country’s investment base and a transition toward a cashless digital economy. To this end, the Saudi Arabian Monetary Authority launched Fintech Saudi in April 2018 to catalyze the development of the industry.
The GCC is also at the forefront of innovation in the digital assets space. Earlier this year, the Abu Dhabi Securities Exchange approved a digital currency trading platform, and the country’s sovereign wealth fund has invested in the venture.
Saudi Arabia and the broader GCC region are tapping into emerging markets in more ways than one. The Kingdom has a very ancient past — the prehistory of the country shows some of the earliest traces of human activity in the world — but its society and business infrastructure are undergoing rapid transformation. From welcoming in outside capital to being an eager adopter in the digital assets and fintech space, whatever lies beyond 2020 for the Kingdom and the region, it promises to be innovative, fast-moving and creative. However, it is vital for the long-term
health of the profession that the innovation and transformative energy in such obvious evidence are underpinned by sound professional standards.
We have a vital role to play in the development of the region’s capital markets via the provision of such standards, and crucially, education. The Kingdom is one of the fastest growing markets in MENA and we welcome its commitment to greater transparency and putting the interests of investors first. We also encourage more countries in the region to promote fairness, transparency and ethics in the investment profession.

G7 backs extension of G20 debt freeze, calls for reforms 

Updated 25 September 2020

G7 backs extension of G20 debt freeze, calls for reforms 

  • Group of Seven ‘strongly regret’ moves by some countries to skip participation in debt relief for world’s poorest nations

WASHINGTON: G7 finance ministers on Friday backed an extension of a G20 bilateral debt relief initiative for the world’s poorest countries, but said it must be revised to address shortcomings hindering its implementation.

In a lengthy joint statement, the ministers from the Group of Seven advanced economies said that they “strongly regret” moves by some countries to skip participation by classifying their state-owned institutions as commercial lenders.

Two officials from G7 countries said the reference was clearly targeted at China, which has refused to include loans by the state-owned China Development Bank and other government-controlled entities in its official bilateral debt totals when dealing with countries seeking debt relief.

The ministers also acknowledged that some countries will need further debt relief going forward, and urged the Group of 20 major economies and Paris Club creditors to agree on terms by next month’s meeting of G20 finance ministers.

“Everyone was disappointed by China’s lack of transparency and commitment,” said one official, who asked not to be named.

At an online meeting hosted by US Treasury Secretary Steven Mnuchin, the ministers underscored their commitment to work together to support the poorest and most vulnerable countries, which have been hard hit by the coronavirus pandemic.

They asked the International Monetary Fund and World Bank to provide regular updates on the financing needs of low-income countries and propose solutions for expected financing gaps, including through instruments to leverage access to private finance.

They said the Debt Service Suspension Initiative (DSSI) approved in April by G20 countries, including China, had helped 43 countries defer $5 billion in official debt service payments to free up money to respond to the pandemic.

But the total is far short of the $12 billion in savings that were initially projected, and represents just over half of the 70-plus countries that were eligible.

The ministers said the initiative should be extended, “in the context of a request for IMF financing,” and called for a new term sheet and memorandum of understanding to improve its implementation.

The ministers said claims classified as commercial under DSSI would also be treated as such in future debt treatments and for implementation of IMF policies, delivering a stern reminder to China and others that have not been fully transparent about the scope and terms of government lending to poor countries.

The ministers also called again on private lenders to implement the debt relief initiative when requested, noting that the absence of private sector participation has limited the potential benefits for several countries.