Middle East
15 February 2011
As many Arab countries aim to become the new face of financial services in the region, there are barriers still to overcome
Image: Shutterstock
With billions of dollars worth of black gold buried under the desert sand, the oil rich countries of the Middle East have always had a huge financial impact on the rest of the world. But until recently, most did not have the developed financial infrastructure that was seen in the West.
This has all changed. Dubai was first out of the blocks with plans to transform itself from a sleepy desert city with oil into a global powerhouse, investing in trade, property, tourism and of course finance. Other members of the UAE followed, with Qatar, Oman and others racing to catch up.
The scale of the investments and the speed of the reforms have been mindblowing. Billions have been spent on ensuring the technical infrastructure is in place, while the authorities in each country making the most of existing best practices elsewhere in the world to create and environment in which to trade. Skyscrapers have sprung up to house the people and businesses working there, and a huge investment has been made in promoting the various jurisdictions - Qatar鈥檚 winning bid for the 2022 football World Cup is proof that virtually no goal is too great and nothing is impossible.
But it hasn鈥檛 all been plain sailing. The region has suffered during the downturn, with Dubai particularly badly hit. And there are concerns in some quarters that the levels of transparency, as well of the legitimacy of some of the firms working in the space, are not yet up to standards seen elsewhere. There is no doubt, however, that the governments and associations are working hard to get it right.
Qatar Exchange has announced that it is planning to introduce short selling, as well as bond and sukuk trading in the first quarter of this year. The practice is currently banned, as is securities lending.
The exchange, which is part-owned by NYSE Euronext, also says it expect restrictions on foreign ownership in domestic companies to be raised from the current 25 per cent to 49 per cent. Derivatives trading may also be implemented.
Speaking in Beirut at the end of 2010, Saif Al-Mansoori, the exchange鈥檚 deputy CEO, said: 鈥淲e are looking at our weaknesses and are starting to address them one by one鈥�, in an attempt to achieve MSCI鈥檚 designation as an emerging market. It is currently classified a frontier market.
Meanwhile, Abu Dhabi Exchange has asked the market regulator of the UAE for permission to introduce short selling in its markets, with the same ambitions as its neighbour.
An active market for short selling and securities lending represent two of the six criteria required by MSCI to gain emerging market rather than frontier market status.
The lack of short selling was highlighted by Data Explorers recently, which pointed to Dubai listed Emaar Properties, which had a tough time issuing some debt to raise money. The $500 million of convertible bonds had incurred costs of an estimated $50 million over a five year period because of the high coupon (7.5 per cent) the company had to pay to investors since they could not hedge the convertible bond position by selling the equity short. This bond was effectively priced like a corporate not a convertible, with the equity option given away for free.
Other Dubai issued debt with similar yields and popular with institutional investors are various bonds from Dubai Electricity and Water Authority. For example, the bond maturing in Oct 2020 and paying a 7.375 per cent annual yield sees 20 per cent of the issue value in lending programmes (if the issue value is $161 million). A small amount is on loan ($8 million).
鈥溌槎勾� lending is coming to the region, it鈥檚 just a matter of time,鈥� says one representative of a major global bank that has a major footprint in the region. 鈥淎nd as soon as it鈥檚 permitted, I think you鈥檒l see the big majors get involved straight away while the local market builds an understanding of how it all works before they dip their toes in.鈥�
The first lenders are expected to engage in synthetic transactions rather than stock loans as happened in Asia. Over time the international investor community, encouraged if the Middle East secured emerging market status, will provide more supply via experienced global custodians. Attractive fees will attract local lenders once the market is established.
Dubai Financial Market and the Qatar Exchange also plan to move to a delivery-versus-payment system this quarter as the bourses seek to boost their chances for inclusion in the MSCI Emerging Markets Index.
The move 鈥渋s a significant development for the UAE markets and takes a crucial step forward in elevating the UAE markets to Emerging Markets status by the MSCI,鈥� the DFM鈥檚 chief executive officer Essa Kazim said. 鈥淭his will further promote our markets amongst a larger number of international investment funds.鈥欌��
MSCI cited a dual account structure as one of the reasons for frontier market status of the UAE and Qatar, and kept the countries under review for reclassification. The index provider will revalue its assessment by examining, among others, economic development, trading volumes and market accessibility.
Qatar Exchange has announced that HSBC Holdings, Standard Chartered and Qatar National Bank will begin providing custody services from February in a step toward the delivery-versus-payment mechanism.
However, much work needs to be done to bring the UAE鈥檚 securities exchanges up to a world-class standard, according to analysts and market operators.
鈥淭he markets here still have the potential to become a regional hub for capital markets, bringing listings from Iraq and north Africa,鈥� said Julien Faye, the head of financial markets at Bain & Company in Dubai. 鈥淏ut for that to happen, regulators need to bring in stronger regulations, transparency, and make it cost-efficient for international investors to trade here.鈥�
Axiom Telecom, the mobile phones retailer, is considering a listing on the London Stock Exchange just two months after attempts to float on the Nasdaq Dubai were cancelled because of poor market liquidity, the latest in a series of companies considering listings abroad.
This week, the Dubai oil services company Topaz Energy and Marine also expressed interest in a London listing. Last year, the global ports operator DP World also said it was seeking a dual listing in London.
A steady stream of negative local catalysts wiped out confidence and liquidity on the exchanges over the course of last year, pushing institutional and foreign investors on to the sidelines and causing UAE bourses to underperform compared with their regional peers. Since then, the 麻豆传媒 and Commodities Authority (SCA) has embarked on a plan to revive the markets by introducing regulations aimed at making the market appear more transparent, hoping to bring investor capital back to the exchanges.
鈥淭he Abu Dhabi 麻豆传媒 Exchange is in the process of drafting a five-year strategic plan, which would include initiatives to position Abu Dhabi as a capital markets hub,鈥� said Elie Ghanem, the head of market and product development at the Abu Dhabi bourse. 鈥淭he Government of Abu Dhabi has selected the exchange to be a champion of this initiative and it is something we are taking very seriously.鈥� The proposal is yet to be reviewed and submitted to the board.
This has all changed. Dubai was first out of the blocks with plans to transform itself from a sleepy desert city with oil into a global powerhouse, investing in trade, property, tourism and of course finance. Other members of the UAE followed, with Qatar, Oman and others racing to catch up.
The scale of the investments and the speed of the reforms have been mindblowing. Billions have been spent on ensuring the technical infrastructure is in place, while the authorities in each country making the most of existing best practices elsewhere in the world to create and environment in which to trade. Skyscrapers have sprung up to house the people and businesses working there, and a huge investment has been made in promoting the various jurisdictions - Qatar鈥檚 winning bid for the 2022 football World Cup is proof that virtually no goal is too great and nothing is impossible.
But it hasn鈥檛 all been plain sailing. The region has suffered during the downturn, with Dubai particularly badly hit. And there are concerns in some quarters that the levels of transparency, as well of the legitimacy of some of the firms working in the space, are not yet up to standards seen elsewhere. There is no doubt, however, that the governments and associations are working hard to get it right.
Qatar Exchange has announced that it is planning to introduce short selling, as well as bond and sukuk trading in the first quarter of this year. The practice is currently banned, as is securities lending.
The exchange, which is part-owned by NYSE Euronext, also says it expect restrictions on foreign ownership in domestic companies to be raised from the current 25 per cent to 49 per cent. Derivatives trading may also be implemented.
Speaking in Beirut at the end of 2010, Saif Al-Mansoori, the exchange鈥檚 deputy CEO, said: 鈥淲e are looking at our weaknesses and are starting to address them one by one鈥�, in an attempt to achieve MSCI鈥檚 designation as an emerging market. It is currently classified a frontier market.
Meanwhile, Abu Dhabi Exchange has asked the market regulator of the UAE for permission to introduce short selling in its markets, with the same ambitions as its neighbour.
An active market for short selling and securities lending represent two of the six criteria required by MSCI to gain emerging market rather than frontier market status.
The lack of short selling was highlighted by Data Explorers recently, which pointed to Dubai listed Emaar Properties, which had a tough time issuing some debt to raise money. The $500 million of convertible bonds had incurred costs of an estimated $50 million over a five year period because of the high coupon (7.5 per cent) the company had to pay to investors since they could not hedge the convertible bond position by selling the equity short. This bond was effectively priced like a corporate not a convertible, with the equity option given away for free.
Other Dubai issued debt with similar yields and popular with institutional investors are various bonds from Dubai Electricity and Water Authority. For example, the bond maturing in Oct 2020 and paying a 7.375 per cent annual yield sees 20 per cent of the issue value in lending programmes (if the issue value is $161 million). A small amount is on loan ($8 million).
鈥溌槎勾� lending is coming to the region, it鈥檚 just a matter of time,鈥� says one representative of a major global bank that has a major footprint in the region. 鈥淎nd as soon as it鈥檚 permitted, I think you鈥檒l see the big majors get involved straight away while the local market builds an understanding of how it all works before they dip their toes in.鈥�
The first lenders are expected to engage in synthetic transactions rather than stock loans as happened in Asia. Over time the international investor community, encouraged if the Middle East secured emerging market status, will provide more supply via experienced global custodians. Attractive fees will attract local lenders once the market is established.
Dubai Financial Market and the Qatar Exchange also plan to move to a delivery-versus-payment system this quarter as the bourses seek to boost their chances for inclusion in the MSCI Emerging Markets Index.
The move 鈥渋s a significant development for the UAE markets and takes a crucial step forward in elevating the UAE markets to Emerging Markets status by the MSCI,鈥� the DFM鈥檚 chief executive officer Essa Kazim said. 鈥淭his will further promote our markets amongst a larger number of international investment funds.鈥欌��
MSCI cited a dual account structure as one of the reasons for frontier market status of the UAE and Qatar, and kept the countries under review for reclassification. The index provider will revalue its assessment by examining, among others, economic development, trading volumes and market accessibility.
Qatar Exchange has announced that HSBC Holdings, Standard Chartered and Qatar National Bank will begin providing custody services from February in a step toward the delivery-versus-payment mechanism.
However, much work needs to be done to bring the UAE鈥檚 securities exchanges up to a world-class standard, according to analysts and market operators.
鈥淭he markets here still have the potential to become a regional hub for capital markets, bringing listings from Iraq and north Africa,鈥� said Julien Faye, the head of financial markets at Bain & Company in Dubai. 鈥淏ut for that to happen, regulators need to bring in stronger regulations, transparency, and make it cost-efficient for international investors to trade here.鈥�
Axiom Telecom, the mobile phones retailer, is considering a listing on the London Stock Exchange just two months after attempts to float on the Nasdaq Dubai were cancelled because of poor market liquidity, the latest in a series of companies considering listings abroad.
This week, the Dubai oil services company Topaz Energy and Marine also expressed interest in a London listing. Last year, the global ports operator DP World also said it was seeking a dual listing in London.
A steady stream of negative local catalysts wiped out confidence and liquidity on the exchanges over the course of last year, pushing institutional and foreign investors on to the sidelines and causing UAE bourses to underperform compared with their regional peers. Since then, the 麻豆传媒 and Commodities Authority (SCA) has embarked on a plan to revive the markets by introducing regulations aimed at making the market appear more transparent, hoping to bring investor capital back to the exchanges.
鈥淭he Abu Dhabi 麻豆传媒 Exchange is in the process of drafting a five-year strategic plan, which would include initiatives to position Abu Dhabi as a capital markets hub,鈥� said Elie Ghanem, the head of market and product development at the Abu Dhabi bourse. 鈥淭he Government of Abu Dhabi has selected the exchange to be a champion of this initiative and it is something we are taking very seriously.鈥� The proposal is yet to be reviewed and submitted to the board.
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