Changes to Qatar's MSCI Emerging Markets Index

Recent financial and legal changes in Qatar can be expected to make a major splash in international financial markets, and will almost certainly have major implications for Qatar's long-term growth. Having only recently been included within MSCI's Emerging Markets Index, the country's weighting on the index is expected to increase from 0.57% percent to 0.46% this month. According to EFG-Hermes Holding SAE, a Cairo-based investment bank, that change could attract nearly $100 million of new investment capital.

Recent changes in Qatar

The country's addition to the MSCI Emerging Market Index was the last major shift in the Qatari financial landscape, in what was described as the end of a "long journey" by Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC Holdings Plc. The development took place after six years of continuous efforts to obtain an upgrade to Emerging Market status, which has certainly lent a new sense of business legitimacy to the world's richest country per capita. The upgrade was facilitated in large part by changes to the country's rules relating to ownership of domestic business entities, as well as implementations of the buyer cash-compensation procedure on the country's largest exchange.

Changes to the ownership rules for companies publicly-traded on Qatari Exchange

In the past, companies listed on the domestic Qatari bourse were limited to foreign ownership levels no higher than 25%. While there were some exceptions, this general limitation on foreign ownership of publicly listed firms operated, at least to some extent, to prevent consideration for the emerging markets upgrade.

To be sure, the recent change was not the first time Qatar had considered changing its foreign ownership limitations for companies publicly-traded on Qatar's largest exchange. As early as 2010 changes allowing for up to 100% foreign ownership were being considered. Yet following the Qatari Amir's May 2014 edict that all publicly listed firms raise their foreign ownership levels to 49%, the Qatari bourse has certainly gained an important level of credibility in the eyes of investors around the world.

Why the buyer cash-compensation procedure matters

A recent change to the operation of the largest Qatari bourse has made it a safer place to trade. That change relates to the buyer cash-compensation procedure, which provides a short-term safety net to traders. The recent implementation of this rule on the exchange allows investors to be paid in cash if a security is unavailable for delivery on settlement day. The result is an increased liquidity that strengthens the perceived and actual viability of Qatar's largest exchange, not to mention the attractiveness of the MSCI Emerging Market index to would-be investors.

What weighting really means for Qatar

According to HSBC analysts Vijay Sumon and Joaquim de Lima, “[a]n upgrade will potentially result in access to a larger pool of investments," which means more potential for growth. In essence, the increase in Qatar's weighting on the index directly translates to an increase in Qatar's share of the global marketplace. Funds tracking the MSCI Emerging Markets index will automatically have a greater percentage of their portfolio invested in the country's future as of the date of the weighting increase. This of course lends not only credibility to the "emerging" Qatari economy, but also cash and liquidity.

Even still, the implications extend well beyond the short-term liquidity that will enable the bourse to operate at higher volumes, at a faster pace, and with increased investor security. The changes also speak to a larger trend on the part of the Qatari government to modernize the financial system, advance domestic business, and to allow the country to invest in its plentiful hydrocarbon resources, while ultimately growing beyond its hydrocarbon dependency.

Qatar's nascent tech sector

Short-term investment will spur an already advancing GDP, currently growing at around 6 to 7% according to the IMF. Hundreds of millions of dollars are already being funneled into the oil and gas sectors, generating increasing revenues that will allow for economic diversification, not to mention preparation for the 2022 FIFA World Cup. While Qatar sits on vast resources of oil and gas, these recent changes indicate an understanding of the importance of economic diversification, and a potential for advancement of the domestic technology sector.

Projects like the Qatar Science & Technology Park, a member of the Qatar Foundation and a government-driven "free-zone," is a shining example. A breathtaking complex covering 120 hectares, the organization provides seed money to startups as well as mentorship and entrepreneurial training critical for the kind of diversification that the country needs. The Qatar Science & Technology Park also permits 100% foreign ownership for companies organized within the free zone, and is a tax free environment, in a manner similar to the way in which the UAE has spurred investment and economic diversification.

The way ahead

As early as 2006, the Qatari regime has committed to the investment of approximately 2.8% of GDP toward research and development. With GDP continuing to grow, and now with the influx of cash to Qatar's financial sector resulting from the MSCI upgrade and subsequent re-weighting, the proliferation of these sorts of tech-oriented projects is likely to continue.  The big question is more of a political question than anything else, namely, whether Qatar's leadership continue to steer the country down the wiser path of economic diversification and tech-sector growth. So far, we have reason to believe that it will, and these recent change simply confirm the regime's ability to do so.  

Simon Jones is a legal journalist based in Connecticut


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