Saudi FX reserves to rise on MSCI upgrade, privatization plans

Saudi Arabia's foreign exchange reserves are slated to rise over the medium term, supported by the stock market's inclusion in FTSE and MSCI emerging market (EM) indexes and privatization program, according to recent analysts’ reports.

"We view that the inclusion of Saudi Arabia in the FTSE and MSCI EM indices, along with privatization plans which are likely to come to fruition in 2019, will lead foreign exchange reserves to continue rising over the medium-term," Japan’s MUFG bank said in a report.

Meanwhile, Saudi Arabia-based Al Rajhi Capital noted in a separate report that the recent extensive capital market reforms offer further support.

Foreign exchange reserves increased in March and April by a cumulative $19.3 billion to $506.6 billion, from $487.3 billion in February.

The sharp increase in April was primarily due to current account surpluses owing to a rise in oil receipts and foreign borrowing, according to data published by Saudi Arabian Monetary Authority (SAMA).

MSCI is expected to announce its decision on Saudi Arabia’s inclusion on June 20.

“In our view, MSCI may upgrade Saudi Arabia in tranches (like FTSE Russell); as any issues during the initial phase of trades will be addressed/resolved by the Saudi officials,” Al Rajhi Capital said.

A positive MSCI update could potentially trigger $15 to $30 billion in inflows in the next 12 months, according to analysts’ estimates.

Praising Crown Prince Mohammad bin Salman's economic reform programs in line with the Vision 2030 plan, MUFG said: "We continue to take comfort by the vigor surrounding the reform program and see ongoing measures to relax the Kingdom’s social code as evidence of a broader liberalizing agenda.

"We view the initiatives will lift economic growth over the medium term, but our expectations are tempered by the scale and complexity of the change that needs to be delivered," it added.