Saudi Arabia added to the MSCI EM index

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Watch Video: Will Aramco only list its IPO on Tadawul? Saudi Arabia hopes to sell five per cent of the world's largest oil exporter, valuing the company at more than $2 trillion.

Saudi Arabia - home to the Middle East's biggest bourse - and Argentina, pummeled by a currency rout that prompted it to seek help from the International Monetary Fund, join the likes of China, India and Brazil.

The index provider also said it will include the Kuwait in its review next year for a potential move to emerging from frontier markets.

Khalid al-Hussan, CEO of Tadawul, told a news conference in Riyadh that MSCI's move had created market capacity to absorb liquidity and would be the main element in feeding new IPOs. Saudi Arabia should focus on reaping the economic benefits from the reforms being undertaken now.

If Aramco goes public, MSCI capital inflows would double to around $90 billion, according to Usman Ahmed, managing director, investments, at Emirates NBD Asset Management. "When Saudi Arabia is included in the MSCI EM index, its portion will be around at 2.3 percent, reducing South Korea's portion by 0.49 percentage point".

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For Argentina, MSCI's reclassification will reverse a downgrade to "frontier market" status made in 2009 after the Latin American country imposed capital controls.

Over the past three years, the CMA and Tadawul have implemented several measures to open the domestic equity market to worldwide institutional investors. "The part privatisation of Aramco is vital for boosting the government's forex reserves and GDP growth outlook through higher investment".

Ziyad Al-Ashaikh, Deutsche Bank's chief country officer for Saudi Arabia, said: "This represents a major milestone".

MSCI said that it chose to reclassify Saudi Arabia following additional reforms made by the Kingdom's Capital Market Authority (CMA) to align its stock market with others worldwide. Among many factors, he said: The index provider's demands for market openness and regulation and the process by which it satisfies itself that policy changes won't be rolled back.

In 2015, Tadawul introduced a program allowing large global institutions to invest on the market.

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"As of today, foreign investor ownership in the Saudi market is around $9.2 billion, and we expect this ownership to increase until the actual inclusion date".

Although any fund inflow would only be beneficial to the kingdom's stock market, the $10 billion figure in passively managed funds is mere 2% of Tadawul's $523 billion market cap.

"Saudi Arabia is in the early stages of an exciting transformation", he said.

Analysts at Bank of America Merrill Lynch said another effect of Saudi's inclusion would likely be "increased market sophistication". In a nation where women couldn't drive and there were few investment opportunities beyond oil, investors didn't see much of a long-term opportunity.

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