MENA Capital Market Summit 2016 report

Capital markets across the MENA region are undergoing aperiod of rapid reform, from the creation of liquid bond markets in the UAE andthe internationalisation of Saudi Arabia to the formation of a fintechecosystem in Abu Dhabi.

The seventh Global Investor/ISF Summit, which took place in Dubai on 26 September, brought together leadingindustry figures to discuss the issues shaping the market. What follows are thehighlights of the discussions that took place.

GCC bond market boom

Bond marketsacross the Gulf Cooperation Council (GCC) are undergoing rapid development, interms of both sovereign and corporate issuance.

Theemergence of a stronger regional fixed income market provides a concrete exampleof how the lower oil price, which halved during the second half 2014 from above$100 and has remained low and volatile since, has spurred market reform.

AshishMarwah, senior director – lead investment manager at ADS Securities in theUAE, said that Gulf countries are now looking to build yield curves to providea basis for corporates to price issuance, citing Saudi Arabia's launch of a$17.5bn sovereign bond.

“Look at howstrong the demand is for Saudi bonds among both primary and secondaryinvestors,” he said. “This is increasing liquidity in the market and increasingthe participation of foreign investors, which creates a two-way market that isbeneficial for all investors.”

One factorthat is attracting interest in MENA bond markets is the contrast with developedmarkets where the most credit-worthy nations enjoy negative yields, said SaleemKhokhar, executive director and head of fund management at NBAD in the UAE.

Khokharpoints out that the region also has favourable fundamentals in absolute terms. “Whenyou look at the GCC region, you see good reserves, low debt-to-GDP ratios andstrong government backing for a number of the government-related entities (GREs)and corporates.

“So,thinking beyond government bond issues, when our companies go to the market andraise debt – as they will in the near future – you have quite a strong case fora solid issue, plus decent yield coming to the market. That is all positive.”

However, theboost to the bond markets didn’t mean that an imminent pickup in moribundinitial public offering (IPO) activity was also likely, he added.

“There won’tbe a general pickup in listings, but specific assets will come through from thepublic sector, such as the Saudi Aramco IPO, and there are plenty of assetsthat could come through on the UAE side of the equation as well,” he added.

The push for internationalstandards

The increasing number of internationalinvestors moving into MENA markets has led to demands for changes in custodyand settlement arrangements to ones closer to international standards. Newregulations across the region have sought to bolster regional exchanges to meetthese demands.

“We see things such as short selling being talkedabout more actively, and we may see this speed up in 2017,” accordingto Mohamed Yasin, managing director at NBAD Securities.

There has also been significant movement in termsof investment products being offered. “We’ve also seen things this year such asan ETF being introduced on the Abu Dhabi Global Market (ADGM) and futures beingintroduced on Nasdaq Dubai, reigniting activity last seen before 2008-09. Allthese things are positive for us.”

Robert Ansari, executive director at index compilerMSCI, agreed that demand for evolution in capital markets is in part drivenby the needs of foreign investors. “The demand that MSCI is hearing about fromits clients is largely driven by what is happening in Saudi Arabia.”

According to Ansari, regulation in the region isevolving to capture the protection of local investors as well as seeking toattract international investors. “They are thinking about regulation to providea framework for foreign investment," he said.

Muneer Khan, a UAE-based partners atinternational law firm Simmons & Simmons, noted the important jurisdictionalchallenges that need to be addressed between the varying regulatory frameworks,such as ones within the UAE.

"We often get asked by international investors,asset managers and financial institutions looking at greater involvement in theregion how the different jurisdictions fit together, and about theinterplay between regulatory regimes.

“We see increased dialogue between regionalregulators. We’re still some way from a passporting regime, but one of theinteresting and unusual factors is that some of the newer regulators andauthorities – such as those in the DIFC and the ADGM – are pushing that agendaand acting as advocates for the industry,” said Khan.

Investorrelations

New regulations in the UAE have made it mandatory forlisted companies to establish an investor relations (IR) function and developproactive communications with the market.

Alex MacDonald-Vitale, chairman of the Middle EastInvestor Relations Association, said that while infrastructure and regulationhave significantly improved in recent years enforcement remains a challenge.

“We need to establish a consistent standard, withboard directors and senior executives leading the cultural shift to greateropenness and accountability – precisely the effort that the IR role is designedto support. The mechanics are there, now we just need to see delivery of theinternational standards professional investors expect."

The IR function is still maturing, saidMacDonald-Vitale, with access, transparency and proactive disclosure bywords ofbest practice. “These principles are the foundation for successful C-suiteengagement with investors, but it has to become an ongoing effort."

Research had shown that while a number of influentialinvestors had come in to the region with enthusiasm following a successfulfirst meeting with IR representatives and the C-suite, they were unable to remaindue to lack of continuity.

"For an institutional investor, the initialmeeting with executive management is just the beginning of a long-term processin building trust and conviction. If senior representatives fail to engage forfollow-up due diligence meetings, professional investors lack the crucialelements needed to retain their positions,” said MacDonald-Vitale.

Saudi transformation

The much-anticipated liberalising reforms in SaudiArabia, set out in its Vision 2030 reform blueprint, will be far-reaching andsome of its effects are already being felt.

Ryan Lemand, managing director and head of assetmanagement and wealth management at ADS Securities, highlighted the"transformational" nature of the changes taking place in Saudi Arabia:“Actions taken by policymakers in Saudi Arabia, such as opening up capitalmarkets, are moving things forward slowly but surely.”

While some investors took the recent news thatgovernment ministers’ salaries are being cut as a sign of financial troubles,Lemand argued the opposite: “The message is that they are reforming from thetop down.”

Lemand noted that many other changes in SaudiArabia that were taking place below the radar, such as the recent move from theHijri calendar to the Gregorian calendar. He said it was a huge change for aconservative country such as Saudi: “It is all part of the message that it isreaching out to global investors.”

Fintech ecosystem

Fintech has become established as core focus for theAbu Dhabi Global Market (ADGM), with plans to establish the pre-eminentecosystem in the region.

The executive director of capital markets at theADGM’s Financial Services Regulatory Authority, Wai Lum Kwok, said that ADGMhas taken a proactive, top-down approach to foster and support a fintech ecosystemfor the MENA region.

"We have been actively developing the ecosystemand bringing key fintech stakeholders together. Among the initiatives we haveintroduced include the Regulatory Laboratory that allows fintech players toexperiment and develop their innovative solutions in a safe and controlledenvironment without being subject to full authorisation requirements."

The importance of an ecosystem goes beyond fintechitself as it informs the way that banks and financial services firms thinkabout the region, said Dima Jardaneh, executive director and head of economicresearch for MENA at Standard Chartered.

“The region's ecosystem was very much centralisedaround oil revenues, but now governments want to reach out to the privatesector and broaden the sources of funding.”

Dubai data

The volume of OTC transaction data emanating in orfrom the Dubai International Financial Centre (DIFC) is expanding at rapidpace, according to Brad Douglas, director of markets at the DFSA.

“Provisional data highlights that the amount andsignificance of OTC fixed income transaction activity emanating in or from theDIFC has increased significantly in recent years.

“In the 12 months to 2015, the amount of OTC fixedincome transaction activity was $1.3trn. For the six months to June 2016 thelevel of OTC fixed income transaction activity has doubled to $1.2trn,projected to be above $2trn for the year of 2016.”