CS Credit Suisse Group

DUBAI—Benchmark provider MSCI Inc. on Tuesday said Saudi Arabia needs to implement reforms that give foreign investors easier access to its stock market, which would boost its chances of winning the emerging-market tag.

The kingdom opened its $404 billion stock market to international investors in June 2015, seeking to attract more foreign capital in its push to diversify away from its dependence on oil revenue. But foreign investments in the Middle East's biggest market have been slower than most expected due to some restrictive rules.

Last month, the Saudi market regulator announced it would allow foreign investors to own larger stakes in listed companies, as well as amending other rules, including changes to the settlement cycle of listed securities and the introduction of a proper delivery versus payment mechanism.

These changes, which are expected to be effective by the middle of 2017, will bring Saudi Arabia closer to emerging-market accessibility standards, MSCI said.

An emerging-market classification by compilers such as MSCI is highly coveted, as it would help attract millions in additional inflows from funds that use such benchmarks. The MSCI Emerging Markets Index is tracked by money managers with some $1.5 trillion of assets.

Credit Suisse Group AG last month said the reforms announced by the Saudi regulator in May will after implementation strongly increase the likelihood of the country being classified as an emerging market by MSCI. But it expects the country to be included in the review process only in June 2017.

"We believe that Saudi Arabia is well placed for a positive outcome, though a decision is only forthcoming after 12 months of deliberation while the implementation occurs after another 12 months. Therefore, the earliest that we believe Saudi Arabia can enter the EM index is June 2019," Fahd Iqbal, the head of Middle East research at Credit Suisse, told clients in a note.

MSCI usually seeks feedback from investors during the review period on the effectiveness of rules that markets implement, especially those related to accessibility.

The index compiler on Tuesday said it would continue to monitor the evolution of the Saudi market opening to international institutional investors.

Saudi Arabia was one of the last major markets globally to restrict international investments before it opened its doors to foreigners last year. The Saudi Stock Exchange's benchmark Tadawul All Share Index closed 0.6% higher at 6626.58 Tuesday ahead of the MSCI announcement but is down about 4% this year.

The kingdom and many of its oil-exporting Persian Gulf neighbors are adopting measures to reshape their economies in an era of cheap energy prices. The kingdom last week unveiled details of plans to more than triple its non-oil revenue by 2020 while cutting state handouts and subsidies as part of an initiative called the National Transformation Program.

Write to Nikhil Lohade at Nikhil.Lohade@wsj.com

(END) Dow Jones Newswires

June 14, 2016 21:35 ET (01:35 GMT)

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