Capital flows in Saudi Arabia to hit record high this year: IIF

Non-resident capital flows (including FDI, portfolio and other investments) in Saudi Arabia is expected to rise to a record $57 billion this year as investors have increased exposure to Saudi Arabia’s equities as a result of the MSCI EM equity index inclusion, the Institute of International Finance (IIF) said in its latest report on Monday.

Overall, IIF projects non-resident capital flows in the MENA region to rise from $165 billion last year to $200 billion in 2019 before tapering off to $173 billion in 2020.

Nearly two-thirds of additional $35 billion inflows in 2019 are associated with Saudi Arabia’s MSCI EM Index upgrade, the IIF maintained.

“Nearly two-thirds of the additional $35 billion in inflows that the MENA region is projected to receive in 2019 can be attributed to portfolio equity inflows to Saudi Arabia in the context of the MSCI EM upgrades in May and August of this year,” IIF noted.

The report further added that early investment positioning in Saudi Arabia was relatively slow following the MSCI inclusion announcement last year due to concerns about policy uncertainty, high valuations for Saudi-listed firms, and reputational issues.

However, it said, it seems that investors have shrugged off such concerns this year.

“The Kingdom attracted $21 billion in foreign portfolio equity flows in the first nine months of this year, becoming the top equity destination among emerging markets, excluding China,” IIF maintained.

IIF also expects Saudi Arabia to continue reaping the benefits of capital markets reform and the inclusion in global indices.

“In the absence of major domestic and external shocks and further deterioration in EM sentiment, Saudi Arabia can count on additional equity inflows from active investors, whose portfolios are benchmarked to the MSCI EM index,” IIF maintained.

The report further added that unlike in other emerging markets where capital flows dynamics have been significantly affected by global monetary easing and trade tensions, the main driving factor behind this year’s foreign capital inflows to MENA has been global benchmark index upgrades in the GCC.

Noting that low oil prices and persistent large fiscal deficits in GCC remain the significant pull factors, IIF noted that sovereign bond issuance continues to dominate non-resident capital inflows in the region.