Arab States Should Beware of Indices Bearing Easy Money - Bloomberg

Arab States Should Beware of Indices Bearing Easy Money - Bloomberg:

The taps of foreign capital are about to open on some states in the Middle East, thanks to their inclusion in key emerging-market indexes. Over the next year, Saudi Arabia and Kuwait are expected to join Egypt, the United Arab Emirates and Qatar in the MSCI EM index. At the same time, Saudi Arabia, Qatar, the UAE, Bahrain and Kuwait are expected to join Oman in the J.P. Morgan Emerging Market government bond index. Kuwait was classified as “secondary emerging” status in 2018 in FTSE’s Russell index, and Saudi Arabia is expected to be included in March.

Inclusion in these indexes will send tens of billions of dollars pouring into their debt and equity markets, requiring little effort by their governments. But this easy money may hinder economic reform, making growth in 2019 less about liberalization, good governance and markets ruled by law, and more about capital simply going where indexes tell it to go—where the state is large, with large natural-resource revenues and risk-averse foreign policies, so long as equity and debt markets are integrated into global financial flows.

Access to this capital will encourage governments to continue to finance their deficits with international debt issuance, while doing little to spur more organic growth in local private companies. While governments have done some groundwork in order to achieve index inclusion, by regulating their capital markets and exchanges, the harder structural reforms of opening economies and creating a level-playing field for business are far from accomplished.