Influential index complier MSCI has extended its review of the UAE and Qatar for emerging market status to December saying it will wait for market participants to provide feedback on the systems implemented before making its decision. 

Qatar and the UAE, currently classified as frontier markets, have been under review for an upgrade for the past two years, but issues such as stringent foreign ownership limits and use of dual account structures have been delaying the move. 

It cited the May introduction of Deliver versus Payment (DvP) settlement systems as a key reason for this delay, which will give market participants more time to give their feedback.

MSCI said it will only accept Qatar as an emerging market if the government increases foreign ownership limits in the market, currently capped at 25 percent. UAE allows foreign investors to own 49 percent of the companies listed on its bourse.

The MSCI decision to delay a review was the 'best possible outcome' for both markets, the regional head of HSBC's securities services said.

'Under the current circumstances, this is possibly the best outcome for both UAE and Qatar. If MSCI had to make a decision now, they would not have been able to upgrade the markets,' Arindam Das said in an interview. 

'The review clearly suggests that the UAE may not have a stumbling block in getting an upgrade six months down the line, while Qatar has to clearly increase foreign ownership to be eligible,' Das said.

If Qatar or the UAE are reclassified as emerging markets, that change would be implemented in MSCI indexes in November 2012, at the earliest, the firm said.

The upgrade was expected to bring in capital inflows to both markets, currently shunned by institutional investors.
HSBC analysts have estimated that Qatar and UAE could receive inflows of $600 million should they graduate to the emerging category.

'I personally will be disappointed if markets react negatively to this announcement. I don't think investors in either markets were expecting an upgrade so this is a favorable outcome,' Das said.

'The UAE markets are evolving in the right direction,' said Singer. 'MSCI's decision to extend the review period is recognition of the progress the UAE has made. The extension gives exchanges and regulators another bite at the apple. Further evolution is required to create an ideal capital market environment.    

'I'm encouraged the UAE has made an upgrade to emerging market status a priority.'    

The extra requirements include increasing foreign ownership limits, the introduction of stock borrowing and lending and short selling, plus a deeper derivatives market, Singer added. - Reuters