Regulation and transparency raise regional confidence
As Middle East market growth rumbles on, an increase in standardisation and best practice has bolstered investor confidence in regional markets. CEO Middle East reports
While Middle Eastern financial exchanges continue to grow at colossal rates, issues surrounding regulation and increased market transparency are gradually being addressed with more and more businesses taking the option to go public.
Last month, high profile inductees to the Dubai Financial Market (DFM) included Public Warehousing Company (PWC) Logistics, Al Mazaya Holding Company and National Real Estate Company KSC, bringing the number of listings on the DFM up to 33 alongside 49 securities.
Countries across the region have been reaching record highs. In Bahrain, the Al Salam Bank announced that its Initial Public Offering (IPO) had been 63 times oversubscribed, drawing applications worth close to US $7.17 billion. The bank sold off 35% of its equity through an issue of 42 million ordinary shares worth US $114 million.
The Saudi stock market breached the 20 000 point mark on 22 February, with the all-share index closing up 137 points to a record high 20 061.69.
The DFM also announced that the value of e-trading on the market was close to AED8 billion with more than
82 453 trades made on 722 million shares in January.
Last year saw the grand total of market value capitalisation on the DFM increase by over AED274 billion on the previous year, while trade value increased by over AED354 billion.
On Jordan’s Amman Stock Exchange (ASE), which gained 40 new members between 2001 and 2005, market GDP was 326.6% in 2005 compared to 184.7% in the previous year.
In the immediate future at least, this rapid growth is likely to be “eclipsed”, according to Nasser Al Shaali, COO of the Dubai International Financial Exchange (DIFX).
Speaking at the Gulf Wealth Forum in Dubai last month, Al Shaali said: “The UAE stock markets (in 1999) were a US $27 billion unregulated business. Today we have flourishing stock markets in all GCC countries and, with the decision to float the DFM, we have taken a giant step forward.”
Regional markets have flourished over the past 12 months with 2005 IPO activity in the Middle East increasing by 100% on the previous year with US $6 billion raised by investors.
One of the reasons for this continual growth is an improvement in regulation and transparency, which has boosted the confidence of many businesses and encouraged them to use the market as a vehicle to diversify.
A recent initiative that has contributed to this trend is the creation of the ‘Hawkama’ body, an institute for corporate governance, established by the Dubai International Financial Centre (DIFC) and other international organisations including the Union of Arab Banks and the International Finance Corporation.
The organisation aims to promote corporate sector reform, assisting countries in the region to develop and implement sustainable corporate governance strategies. On a broader scale it aims to help the region to integrate economically and financially with the rest of the world.
Speaking at the launch, Dr Omar bin Sulaiman, director general of the DIFC Authority, the body of the DIFC charged with developing strategy and overall supervision, said: “Laws, regulations and standards, institutions and enforcement mechanisms are the core constituents of a robust corporate governance system.”
Other Middle Eastern regulatory bodies that have bolstered investor confidence are the Securities and Commodities Authority in the UAE and the Capital Market Authority in both Saudi Arabia and Oman.
Currently listed on the Kuwait Stock Exchange and included on the Dow Jones DIFC Arabian Titans 50 index, PWC Logistics joined the DFM in February. Ehab Aziz, chief financial officer at the company told CEO Middle East: “Regional markets have undergone significant improvements in terms of regulatory aspects to bring more transparency and gain investor confidence, and should continue with the reforms and regulation to reach the level of other global markets.”
He also stated that it is the responsibility of every company to “maintain a high level of transparency” and that the investment community and the stock exchange could “only guide or provide direction”.
Aziz maintained that the “vibrant and dynamic” DFM is one of the fastest growing exchanges in the region and that gaining significant interest from regional and international players will help PWC achieve its strategic goals.”
Attributing the recent swell in IPO activity to “the amount of demand and liquid wealth that the region has accumulated”, Nasser Al Shaali, COO of the DIFX, told CEO Middle East: “Current shareholders of a company will instantly multiply the value of their stakes in the company by going public. On the way, they will also raise capital to expand and acquire while also making their future shareholders rich. The result of unlocking the value of any enterprise is an environment of abundant liquid wealth.”
So, while markets continue to blossom with IPOs being oversubscribed ten times over, how will the future shape up?
Al Shaali said regional corporations had only recently emerged to play a more active role in global business.
“As they re-align their business models, they will need to raise more capital and hence the desire for more IPOs. In the next two years, a lot of family owned businesses will go public. As awareness of corporate governance issues grow, markets will mature and become better regulated,” he added.
While it is difficult to predict how long this meteoric rise in public activity will continue, what is certain is that GCC markets, with more attention paid to regulation and financial transparency, are fast measuring up to the established exchanges of the west.