Until recently, Saudi Arabia tantalized investors with a plan to float its mammoth oil and gas company's initial public offering on an international exchange — then left them deflated after it shelved the idea.
For now, Saudi Aramco will only be listed on the Tadawul, the country's domestic exchange. However, global investors have taken heart from a little noticed change from the FTSE global equity index series, a major market benchmark that in March classified Saudi Arabia's stock exchange as a "secondary emerging" market.
The FTSE's move — which officially makes Saudi Arabia's domestic market a benchmark available to global investors — coincided with an international charm offensive launched by the kingdom's powerful crown prince, Mohammed bin Salman. It also marked a significant milestone on the prince's quest to diversify Saudi Arabia's oil-reliant economy and gives investors a backdoor to park cash in the country.
"The FTSE inclusion means that Saudi has technically met the standards required for [emerging market] investors from a trading and operational perspective," said Asha Mehta, portfolio manager and head of emerging and frontier market strategy with Acadian Asset Management.
"This is a major development, given that Saudi's equity market was closed to foreign investors just a few years ago," Mehta said, adding that "the country's weight could be sizable —potentially as large as Mexico or Russia."
Ahead of the Aramco floatation, the inclusion of Saudi Arabia in emerging market indexes was a development eagerly awaited by market watchers.
Given historical limits to accessing the market, the country has not been included in major benchmarks prior to the FTSE classification, so the move could represent a watershed for both Saudi Arabia and investors hungry for yield.
"The FTSE upgrade is important and a key reflection of the improvements in the financial plumbing that Saudi Arabia has made in recent years, but the next step to attracting equity inflows is to prove the macro story and issuance," said Rachel Ziemba, an emerging market analyst and adjunct fellow at the Center for New American Security.
"Reducing restrictions to purchase is important, but so is the macro story: growth, liquidity, and future profits, as are the flows," she added.
MSCI, another closely watched developing market index, may also weigh changes to its composition in the coming months, analysts say. Should Saudi Arabia be included, it would represent another sign of international confidence in a market traditionally reserved for domestic capital.
Tadawul remains the only entity authorized in Saudi Arabia to act as the kingdom's securities exchange to list on and trade in securities. With a market capitalization $466 billion, Tadawul ranks 25th out of 68 of the largest members of the World Federation of Exchanges.
The potential of an Aramco float looms large, with Saudi Arabia set to grab 75 percent of the value traded, making it the most dominant market across the Gulf region.
Mideast observers are fairly certain an Aramco IPO will happen, but a delay could work in Saudi Arabia's favor, they say. With oil now ticking higher, it presents an opportunity for the country to balance its budget and help the kingdom push for a higher valuation for Aramco.
Still, for several reasons, some argue that Saudi Arabia has a long way to go to become a top destination for investor capital.
"While inclusion in the FTSE and MSCI indices would be positive for investor sentiment, we caution that [Saudi Arabia's Capital Market Authority] would need to consolidate these confidence gains to attract regional IPOs," said Raphaele Auberty, a country risk analyst with London-based BMI research.
While an international listing for Aramco hasn't been entirely ruled out, market watchers have their doubts. One of the biggest questions that had always swirled around a potential foreign listing was how compliant Saudi officials — and by extension Aramco — would be about Western standards of governance and disclosure.
"Since an IPO would also mean that Saudi Aramco would have to reveal a good deal of proprietary information about its operations and maintain transparency standards, there will be natural resistance to an IPO unless it is absolutely necessary," said Indranil Ghosh, CEO of Tiger Hill Capital.
"In order to list Saudi Aramco, the government will need to disclose … strategic information. Reluctance to do so could threaten the IPO," Auberty added, noting additional pressure from insufficient domestic liquidity and competition from other established regional exchanges like Dubai's.