What would 'emerging market' status mean to the UAE and Qatar? (page 1 of 2)

This month bourses in the UAE and Qatar will discover whether they have been awarded the much-coveted 'emerging' market status by global equity index provider MSCI. In its last three reviews, conducted at six-month intervals, MSCI kept both energy exporters as 'frontier' markets. Most recently, in December last year, MSCI urged the UAE to introduce new regulations to allow securities borrowing and short-selling, and repeated a plea to Qatar to raise foreign ownership limits from 25 percent.

So why is the MSCI rating so important, and what are the Gulf countries' chances of meeting MSCI's 'emerging' market criteria?

"The most important impact would be the financial impact, because a lot more institutions and foreign investor capital would be redirected towards the UAE or Qatar if they're [upgraded], which would boost local prices," Ghassan Chehayeb, director of MENA Credit Research at investment bank Exotix, tells AMEInfo.com.

"Secondly, aside from the cash that would be coming in, it would also create more efficiency in the markets because of the increase in institutional involvement and foreign smart money, as opposed to the current market status which is mostly dominated by retail investors," he continues. "Finally, most people already believe that the UAE and Qatar are 'emerging' markets rather than 'frontier' markets, but because of the foreign ownership limitations they have had a tricky time getting [upgraded]. An upgrade would put an official seal on things, and a lot of foreign investors would feel more comfortable about investing in these countries knowing they had the stamp of approval from MSCI."

Foreign ownership is stumbling block

In order to meet MSCI criteria, the two Gulf countries will have to overcome significant obstacles, foremost among them the two states' reluctance to open up to foreign ownership. In Qatar, the world's richest country per capita, there would be significant interest from foreign investors if they were not stymied by inflexible limits which stipulate that companies may have a maximum 25% foreign ownership. The country's stock market, the Qatar Exchange, finished 2011 in the black. However MSCI's decision not to upgrade the bourse in December was met with more of a shrug than howls of disappointment - stock market authorities simply described the call "as understandable in view of the fact that no changes have yet been made to foreign ownership limits".

"The major thing holding back both markets is a lack of foreign ownership capacity," says Chehayeb at Exotix. "It's similar to inviting lots of tourists to your hotel, and then when they get there, telling them that there are no rooms left. There's just not enough capacity in the companies to swallow all of these new fund flows, and while it has improved marginally in the UAE in recent months with a few companies boosting foreign ownership, there has been no progress whatsoever in Qatar."

The December decision was met with greater dismay by bourse officials in Dubai and Abu Dhabi. However, there is optimism among officials at the Dubai Financial Market (DFM) group, which includes its subsidiary Nasdaq Dubai. "The decision gives the UAE the opportunity to improve some of its operations and work aggressively over the next few months to makes changes that would enable institutional investors to come into the market," Nasdaq Dubai CEO Jeff Singer said after the December snub.