In FTSE Russell’s “Annual Country Classification Review“, two countries – Romania, and Saudi Arabia – were placed on the “Secondary Emerging Markets Watch List”. Here’s what was said regarding each country.
Romania was added to the Watch List in September 2016 for a possible upgrade from “Frontier Market” to “Secondary Emerging Market” status. One of the major changes that has happened since last year is the introduction of legislation permitting stock lending, which allowed the FTSE Russell Country Classification Advisory Committee (FTSE RCCAC) to upgrade this factor from “Not Met” to “Restricted”, further improving Romania’s chances of becoming an Emerging Market.
The only key criterion that has yet to be met is “Liquidity – Sufficient broad market liquidity to support sizable global investment”, a factor that FTSE acknowledges the efforts the Bucharest Stock Exchange is looking to improve, such as bringing initial public offerings (IPOs) to the market and improving liquidity levels on the exchange. Hidroelectrica, Romania’s hydro-power producer, is set to be the first IPO of a Romanian state-controlled company since 2014.
Results will be announced in September 2018.
FTSE decided to keep Saudi Arabia as an “unclassified” market, meaning that it will have to wait until March 2018 before being reconsidered for an upgrade to an “Emerging Market” and will have to demonstrate the practical operation of reforms to the market before achieving this status.
In 2017, the Capital Market Authority of Saudi Arabia and the Saudi Arabia Stock Exchange (Tadawul) introduced a wide range of measures to improve market infrastructure by opening up the domestic market to international investors (such as simplifying the Qualified Foreign Investor scheme and introduced a T+2 settlement cycle).
The following criteria changes were noted by FTSE:
|Investment Restrictions||“Restricted” to “Pass”||Penalties applied to the investment or repatriation of capital|
|Settlement||“N/A” to “Restricted”||Measures incidences on failed trades|
|Custody||“Restricted” to “Pass”||Ensuring high quality custodian services via increased competition|
|Clearing & Settlement||“Not Met” to “Restricted”||T+2 Settlement Cycle|
|Stock Lending||“Not Met” to “Restricted”||n.b: despite new legislation, only a limited number of stocks are currently permitted.|
|Short Sales||“Not Met” to “Restricted”||n.b: despite new legislation, only a limited number of stocks are currently permitted.|
As a result of these reforms, FTSE commented that Saudi Arabia is in line to meet the requirements to be included in the “Secondary Emerging Market” list from early 2018 when additional enhancements are introduced to the Independent Custody Model (ICM).
FTSE will also launch stand-alone Saudi Arabia indexes to assist both domestic and international investors with the opportunity to gain index-based exposure to the market. Index rival MSCI already have a range of stand-alone Saudi indexes, so it’s no surprise that FTSE will do the same.