* MSCI seen deciding June 20 to review Riyadh for EM status
* Huge Aramco IPO seen H2 2018, will also draw foreign money
* EFG Hermes: over $50 bln in passive/active funds may enter
* Valuations, selling pressure from locals may cap prices
* Success of Saudi economic reforms not yet clear
DUBAI, June 11 (Reuters) - Saudi Arabia's financial sector is hoping for tens of billions of dollars of foreign portfolio funds to start flowing into the country this month, but the money may do little to boost a stock market depressed by low oil prices and rising taxes.
On June 20, global equity index compiler MSCI will announce whether it is putting Saudi Arabia on a list for possible upgrade to emerging market status. Index firm FTSE will decide in September whether to make Riyadh a secondary emerging market.
Then in late 2018, authorities aim to list national oil giant Saudi Aramco in Riyadh, selling about 5 percent in what is likely to be the world's biggest initial public offer of shares.
All three events promise to draw large flows of passive funds - money that benchmarks itself against international indexes - to Saudi Arabia, and by raising the kingdom's profile among global investors, attract a volume of active funds that could be even larger over the next couple of years.
Saudi Arabia will become tied to significant global capital flows. The market could be larger than Turkey, larger than Thailand, possibly larger than Mexico, said Asha Mehta, portfolio manager at U.S. based-Acadian Asset Management, which manages over $77 billion of assets globally.
Only about 60 institutions have become Qualified Foreign Investors in the Saudi bourse since it opened to direct foreign investment in mid 2015; the index changes and Aramco's listing could increase that number.
"The process is gradual, but the boost to liquidity and market capitalisation in Saudi will make some institutions which have been hesitating decide to enter," said Sandeep Srinivas, senior analyst at FIM Partners in Dubai.
But there are signs the inflow of foreign money into Saudi Arabia may be slower than some investors are hoping, and that it may not trigger a strong rise in the Saudi market.
Low oil prices are keeping buyers wary, while austerity steps planned by the government, as it confronts a huge budget deficit, will dampen corporate profits. Local regulations mean there may be little room left for foreigners to raise their stakes in some firms.
"There are a wide range of factors that will dictate the market's direction over the next couple of years, not all of them necessarily positive," said Simon Kitchen, head of macro strategy at regional investment bank EFG Hermes.
Reflecting this, the Saudi stock index has dropped in the run-up to this month's MSCI decision; it is down 5 percent since the start of 2017.
After the exchange began in April to settle trades within two days of execution - the key remaining reform demanded by MSCI - most fund managers think the index compiler is likely to put Riyadh on its review list on June 20.
The actual decision on whether to include Saudi Arabia in MSCI's emerging market index would then occur in mid 2018, and if MSCI follows past procedures, inclusion would occur in mid 2019.
Kitchen estimated MSCI inclusion, not taking into account Aramco's listing, would bring $7.1 billion of passive inflows into Saudi stocks in mid 2019. So some analysts think a positive announcement by MSCI on June 20 will trigger an immediate inflow of active foreign funds.
"We expect foreign funds to enter the Saudi market as soon as MSCI announces the watch list inclusion, and to gradually increase as we get closer to a potential implementation date," said analysts at regional firm Arqaam Capital.
If FTSE decides in September to upgrade Riyadh, changes in its indexes would probably occur in September 2018; this could bring $3.5 billion of passive funds.
Aramco's listing would magnify MSCI- and FTSE-related passive inflows. Kitchen estimated the extra money at $4.8-9.6 billion, depending on whether Aramco achieved a valuation of $2 trillion as the government hopes, or about half that as some analysts believe possible.
In addition, $12-31 billion of active funds could flow in if the index changes and Aramco's listing boost foreign ownership of Saudi stocks to the levels of neighbouring Qatar and the United Arab Emirates, Kitchen calculated. About 4.2 percent of the $432 billion Saudi market is currently owned by foreigners.
The result could be inflows totalling over $50 billion in the next two or three years as Saudi Arabia's bourse becomes more international. But that could be offset by cash-strapped local institutions selling stocks.
At about 14 times forward earnings, Saudi Arabia is not cheap compared with MSCI's group of global emerging market stocks, at 12.9 times. And the success of Riyadh's economic reforms, designed to restore growth to an economy shell-shocked by low oil prices, may not be clear for years.
"Will global emerging market funds be underweight or overweight Saudi Arabia? We think an overweight on Saudi Arabia will depend on the successful implementation of the reform programme and will be gradual, hence active flow estimates should err on the side of caution," Kitchen said.
(Reporting by Andrew Torchia; Editing by Mark Potter)