* Decisions will be effective beginning in mid-2019
* MSCI to consult on potential reclassification of Kuwait as EM (Adds detail, background, comment)
By Rodrigo Campos and Trevor Hunnicutt
NEW YORK, June 20 (Reuters) - Index provider MSCI said on Wednesday it will reclassify Argentina as an emerging market and begin including Saudi Arabia in that classification, sharply broadening the investor base for both countries in a move that could be supportive of their equity markets.
The decisions will be effective beginning in mid-2019.
For Saudi Arabia, there is high anticipation over the market listing of state-controlled energy company Aramco, which could be the largest publicly-traded company globally.
International investors' expectations were that "the current privatization effort in Saudi Arabia will continue to grow the investable opportunity set available," Sebastien Lieblich, MSCI managing director and global head of equity solutions, said in a statement.
That should contribute to an increased weight of Saudi Arabia in the Emerging Markets Index in the future, he added.
For Argentina, it is some rare positive news for its economy, as its market-friendly president seeks to normalize the country's international financial standing. It was downgraded to frontier market status in 2009 after former populist President Cristina Fernandez imposed capital controls.
MSCI's benchmarks are widely used, with some $14 trillion in investors' assets tracked against them. The index provider's blessing can launch billions of dollars from index-tracking funds into markets around the world, especially developing economies.
"The addition of Argentina and Saudi Arabia will add diversification to MSCI emerging market indices that are increasingly weighted to South Asian and tech heavy markets such as China, South Korea and Taiwan," said Todd Rosenbluth, director of fund research at New-York based CFRA.
The Saudi index has been among the best performing in the Gulf region, up 13.3 percent year to date.
Saudi Arabia could see $30-45 billion of portfolio inflows in the next two years if it reaches the same level of foreign ownership in stock markets as the United Arab Emirates and Qatar, according to investment bank EFG Hermes.
The MSCI Saudi Arabia Index will have a weighting of approximately 2.6 percent in the emerging markets index with 32 securities, following a two-step inclusion process in May and August next year.
Rosenbluth said he expects investors to add exposure to the iShares MSCI Saudi Arabia ETF and Global X MSCI Argentina ETF ahead of the implementation of the changes.
The Saudi Arabia ETF was up 2.4 percent while the Argentina ETF rose 5.3 percent in after-hours trading in U.S. markets.
Saudi Arabia's MSCI index has risen nearly 20 percent this year, while Argentina's is down nearly 40 percent from its 2018 high hit in January.
The overall MSCI emerging Markets index is down 5.6 percent year to date.
Only offshore listings of Argentine companies will be included, such as American Depositary Receipts. International institutional investors said higher liquidity in the domestic market is needed before considering a shift to onshore listings, MSCI said.
It said it would review its decision on Argentina if the country re-introduces capital controls or puts restrictions on its currency's movement.
MSCI also said it will include the MSCI Kuwait Index in its classification review next year for a potential move from frontier to emerging markets. It added that the inclusion of some domestic Chinese shares in its emerging markets index this year is going smoothly so far, according to its clients. (Reporting by Rodrigo Campos and Trevor Hunnicutt, additional reporting by Saeed Azhar; editing by Daniel Bases, Rosalba O'Brien and Grant McCool)