Deal with MSCI to spur capital flow to Saudi

An agreement between Saudi Arabia’s Tadawul, the Middle East’s largest stock market, and MSCI World is expected to spur capital flow into the Gulf Kingdom and further push up the bourse, according to a key Saudi bank.

National Commercial Bank (NCB) said Tadawul had already been stimulated by an upsurge in the domestic economy and preference of equity by local investors at the expense of bank deposits.

In its weekly bulletin, it said this had led to a slowdown in deposits and other monetary indicators in the world’s oil powerhouse and largest Arab economy.

Citing official data, the report showed demand deposits have recorded the slowest annual growth rate in 32-months at 16.9 per cent.

“We suspect capital gains in domestic equities were favoured as oppose to increasing idle funds,” it said, adding that trading volumes during the first three months of 2012 averaged at SR10.5 bn in comparison to SR4.1 bn during the same period last year.

“investors have been more comfortable with taking on additional risk as stock evaluations indicate great opportunities for long-term investments. Additionally, the recent agreement between Tadawul and MSCI for the Saudi index to be included in their coverage will increase global exposure for the promising market….this will result in further capital flows and support the market to breach the 8,000 level as soon as June-July,” it added, referring to Tadawul’s deal to be included among more than 1,600 global bourses covered by MCSI World index.

According to NCB, excess liquidity in the Saudi market raises fear of escalating consumer prices and officials have been in a wait-and-see mode of late. But it added that the Saudi private sector seems to have rather eased some of the steam as liquidity sought risky assets in the local equity market.

It showed that the latest official monetary announcement reveals that the base (M0) recorded the slowest annual growth over the last four months and well below 2011’s average at only 5.3 per cent.

It attributed the slowdown to the third consecutive monthly contraction in bank deposits with the Saudi Arabian Monetary Agency.

Consequently, Saudi’s money supply (M3) grew at a relatively moderate pace, 10.5 per cent Y/Y which is the slowest since March 2011, it added.