Gulf stock markets will miss out on getting on the global investment map unless regulators take concrete action to address concerns raised by MSCI, who denied the region emerging market status for the second year running.

The index provider's decision to maintain its frontier market status for Qatar and the UAE last month was a fresh blow to investors who saw an upgrade as a potential catalyst to boost liquidity and fuel inflows.

An upgrade from frontier market status, a classification seen by investors as risky, would force passive funds to allocate more money and provide more room for active funds to add to their investments.

'The governments here have been extremely keen to upgrade the region to emerging market status. However, execution on the ground has been poor so far,' said Rami Sidani, head of Middle East Investment at UK fund manager Schroders.

Most market participants believe that though countries understand the importance of an upgrade they have their hands full dealing with the financial crisis.

In the UAE, Dubai has been grappling with a debt crisis and is restructuring debt at troubled state-linked firms, including flagship conglomerate Dubai World.

Merger plans between the UAE's two main exchanges, crucial for improving liquidity on the bourses, are going slow.

'They (regulators) obviously have larger issues to handle. I do know the intention is at least there,' said Joe Kawkabani who manages the Franklin Mena fund and is managing director for asset management at Algebra Capital.

In Qatar, the tiny Gulf state increasingly growing in stature as a global investor, limits to foreign ownership are seen as the key impediment for an upgrade. The issue is that much tougher to resolve given the need for parliamentary approval for any changes to the law.

'Whereas operating standards are relatively easy to address, the foreign ownership issue is a bit trickier, as it is more linked to the commercial law,' said Kapil Chadda, head of investment banking at HSBC Qatar in Doha.

Ownership limit in a large government-owned company like Industries Qatar (IQ) is a meagre 7 per cent, which prevents asset managers from holding a significant stake.

Also, despite the country's rising economic status, capital markets in Qatar are still embryonic and volumes very thin. 'Liquidity is a concern in Qatar and UAE. If you combine trading volumes of both the markets, they trade less than 25 per cent of Sabic in Saudi Arabia,' said Joseph Rohm, portfolio manager for T Rowe Price's $300 million Africa and Middle East fund in London.

MSCI's main concerns - the need to set up separate trading and custody accounts for institutional investors and foreign ownership restrictions - are unchanged from those cited last year and investors say not enough is being done on the ground to address the issues.

Qatar's regulator declined to comment for the story, while UAE's Securities and Commodities Authority (SCA) was not available for comment.

Many investors are still hoping for an upgrade next year as Dubai stabilises and Qatar builds on baby steps like allowing banks to establish their own brokerages and detailing plans for a vibrant debt market.

'The issues cited by MSCI are not new and addressing them is already included in the strategy of Qatar Exchange,' Andre Went, chief executive of the Qatar Stock Exchange said in an emailed statement.

'The government is very supportive of the development of Qatar Exchange and is aware of the positive impact of a possible upgrade to emerging market,' he said.

Analysts and fund managers also believe that other countries from the region may also be in contention for an upgrade with most expecting Saudi Arabia - the most diverse and liquid Arab bourse as a likely candidate.

'The evolution of markets does not happen overnight. We have come a long way and grown at a rapid pace,' Sidani said.

Gulf stocks have stayed off the radar of many institutional investors due to the opacity of the markets and issues related to transparency and disclosure of companies in the region.-Reuters