Upgrade by MSCI is a vote of confidence in economic models and a positive indicator for regional capital markets

MSCI, Inc., the US-based provider of investment decision support tools and risk and performance analytics, has announced it is upgrading both Qatar and the United Arab Emirates from “frontier market” to “emerging market” status. Qatar and the UAE are the only countries upgraded as part of MSCI’s 2013 Annual Market Classification Review. Regulators and market participants in both countries had been hoping for the upgrade, but it had not been widely expected to occur during the current review season. This positive news has already led to significant share price rises on the Qatar Exchange, the ADX in Abu Dhabi and the Dubai Financial Market. The timing of the upgrade is potentially opportune, coming during a period of general speculation regarding a number of possible new IPOs in both jurisdictions.

“Emerging market” status is among the criteria used by a large number of institutional investors and private equity funds to identify markets in which they can invest. It has been reported that the upgrade may draw as much as US$500 million of new investment into Qatari and UAE securities with the entry of foreign institutional investors and passive or index-tracking investors. It should be noted that actual reclassification will not take place until May 2014.

The upgrade by MSCI recognises advances made by both Qatar and the UAE towards liberalisation, enhanced liquidity, technical developments in their settlement and trading regimes and relaxation of foreign ownership restrictions, although these have by no means been abolished. The promotion to “emerging market” status is also being seen as a more general boost for Qatar and the UAE, and an endorsement of their economic stability and business model, as they join the ranks of other “emerging markets”, such as the BRICS –  Brazil, Russia, India, China and South Africa – as well as other emerging economies such as Mexico, Turkey and South Korea.

The other Gulf Cooperation Council (GCC) jurisdictions – Bahrain, Kuwait, Oman and Saudi Arabia (the GCC’s largest economy) – have not been upgraded, and this may lead to greater pressure to speed up reforms which could ensure promotion to “emerging market” status. The 2013 review by MSCI has also seen Morocco downgraded from “emerging market” to “frontier market” status, due to failure to meet minimum liquidity levels. Both Qatar and the UAE will need to continue to encourage liquidity, which has at times been a challenge in both countries’ markets.