Capital markets across the MENA region are undergoing a period of rapid reform, from the creation of liquid bond markets in the UAE and the internationalisation of Saudi Arabia to the formation of a fintech ecosystem in Abu Dhabi.
The seventh Global Investor/ISF Summit, which took place in Dubai on 26 September, brought together leading industry figures to discuss the issues shaping the market. What follows are the highlights of the discussions that took place.
GCC bond market boom
Bond markets across the Gulf Cooperation Council (GCC) are undergoing rapid development, in terms of both sovereign and corporate issuance.
The emergence of a stronger regional fixed income market provides a concrete example of 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.
Ashish Marwah, senior director – lead investment manager at ADS Securities in the UAE, said that Gulf countries are now looking to build yield curves to provide a basis for corporates to price issuance, citing Saudi Arabia's launch of a $17.5bn sovereign bond.
“Look at how strong the demand is for Saudi bonds among both primary and secondary investors,” he said. “This is increasing liquidity in the market and increasing the participation of foreign investors, which creates a two-way market that is beneficial for all investors.”
One factor that is attracting interest in MENA bond markets is the contrast with developed markets where the most credit-worthy nations enjoy negative yields, said Saleem Khokhar, executive director and head of fund management at NBAD in the UAE.
Khokhar points out that the region also has favourable fundamentals in absolute terms. “When you look at the GCC region, you see good reserves, low debt-to-GDP ratios and strong 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 and raise debt – as they will in the near future – you have quite a strong case for a solid issue, plus decent yield coming to the market. That is all positive.”
However, the boost to the bond markets didn’t mean that an imminent pickup in moribund initial public offering (IPO) activity was also likely, he added.
“There won’t be a general pickup in listings, but specific assets will come through from the public sector, such as the Saudi Aramco IPO, and there are plenty of assets that could come through on the UAE side of the equation as well,” he added.
The push for international
The increasing number of international investors moving into MENA markets has led to demands for changes in custody and settlement arrangements to ones closer to international standards. New regulations across the region have sought to bolster regional exchanges to meet these demands.
“We see things such as short selling being talked about more actively, and we may see this speed up in 2017,” according to Mohamed Yasin, managing director at NBAD Securities.
There has also been significant movement in terms of investment products being offered. “We’ve also seen things this year such as an ETF being introduced on the Abu Dhabi Global Market (ADGM) and futures being introduced on Nasdaq Dubai, reigniting activity last seen before 2008-09. All these things are positive for us.”
Robert Ansari, executive director at index compiler MSCI, agreed that demand for evolution in capital markets is in part driven by the needs of foreign investors. “The demand that MSCI is hearing about from its clients is largely driven by what is happening in Saudi Arabia.”
According to Ansari, regulation in the region is evolving to capture the protection of local investors as well as seeking to attract international investors. “They are thinking about regulation to provide a framework for foreign investment," he said.
Muneer Khan, a UAE-based partner
international law firm Simmons & Simmons, noted the important jurisdictional
challenges 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 the region how the different jurisdictions fit together, and about the interplay between regulatory regimes.
“We see increased dialogue between regional regulators. We’re still some way from a passporting regime, but one of the interesting and unusual factors is that some of the newer regulators and authorities – such as those in the DIFC and the ADGM – are pushing that agenda and acting as advocates for the industry,” said Khan.
New regulations in the UAE have made it mandatory for listed companies to establish an investor relations (IR) function and develop proactive communications with the market.
Alex MacDonald-Vitale, chairman of the Middle East Investor Relations Association, said that while infrastructure and regulation have significantly improved in recent years enforcement remains a challenge.
“We need to establish a consistent standard, with board directors and senior executives leading the cultural shift to greater openness and accountability – precisely the effort that the IR role is designed to support. The mechanics are there, now we just need to see delivery of the international standards professional investors expect."
The IR function is still maturing, said MacDonald-Vitale, with access, transparency and proactive disclosure bywords of best practice. “These principles are the foundation for successful C-suite engagement with investors, but it has to become an ongoing effort."
Research had shown that while a number of influential investors had come in to the region with enthusiasm following a successful first meeting with IR representatives and the C-suite, they were unable to remain due to lack of continuity.
"For an institutional investor, the initial meeting with executive management is just the beginning of a long-term process in building trust and conviction. If senior representatives fail to engage for follow-up due diligence meetings, professional investors lack the crucial elements needed to retain their positions,” said MacDonald-Vitale.
The much-anticipated liberalising reforms in Saudi Arabia, set out in its Vision 2030 reform blueprint, will be far-reaching and some of its effects are already being felt.
Ryan Lemand, managing director and head of asset management 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 capital markets, are moving things forward slowly but surely.”
While some investors took the recent news that government ministers’ salaries are being cut as a sign of financial troubles, Lemand argued the opposite: “The message is that they are reforming from the top down.”
Lemand noted that many other changes in Saudi Arabia that were taking place below the radar, such as the recent move from the Hijri calendar to the Gregorian calendar. He said it was a huge change for a conservative country such as Saudi: “It is all part of the message that it is reaching out to global investors.”
Fintech has become established as core focus for the Abu Dhabi Global Market (ADGM), with plans to establish the pre-eminent ecosystem in the region.
The executive director of capital markets at the ADGM’s Financial Services Regulatory Authority, Wai Lum Kwok, said that ADGM has taken a proactive, top-down approach to foster and support a fintech ecosystem for the MENA region.
"We have been actively developing the ecosystem and bringing key fintech stakeholders together. Among the initiatives we have introduced include the Regulatory Laboratory that allows fintech players to experiment and develop their innovative solutions in a safe and controlled environment without being subject to full authorisation requirements."
The importance of an ecosystem goes beyond fintech itself as it informs the way that banks and financial services firms think about the region, said Dima Jardaneh, executive director and head of economic research for MENA at Standard Chartered.
“The region's ecosystem was very much centralised around oil revenues, but now governments want to reach out to the private sector and broaden the sources of funding.”
The volume of OTC transaction data emanating in or from the Dubai International Financial Centre (DIFC) is expanding at rapid pace, according to Brad Douglas, director of markets at the DFSA.
“Provisional data highlights that the amount and significance of OTC fixed income transaction activity emanating in or from the DIFC has increased significantly in recent years.
“In the 12 months to 2015, the amount of OTC fixed income transaction activity was $1.3trn. For the six months to June 2016 the level of OTC fixed income transaction activity has doubled to $1.2trn, projected to be above $2trn for the year of 2016.”