The most effective way of deepening capital markets in the region would be for governments to privatise more state-owned assets, according to Emirates NBD’s head of fixed income research, Anita Yadav.

Speaking On Wednesday at the Institute of International Finance’s MENA Financial Summit on a panel on capital markets, Yadav said that “to deepen the market, the first thing you need to have is large, private corporates that need money”.

“(In) this part of the world, everything seems to be government-owned. It's only the small SMEs [small and medium-sized enterprises] type which are not big enough to tap the markets that are in the private hands. Privatisation of government assets is probably the starting point,” Yadav said.

She welcomed some of the privatisation efforts that have been made to date, such as the flotation of a 10 percent stake in Abu Dhabi National Oil Company’s fuel distribution unit last year, but added that she felt “much more could have been done”.

“The pace at which it has been progressing, there should have been a little more urgency to it,” Yadav said.

She said that economic growth in the region had slowed over the past three years, with governments owning many of these assets but having less to invest as oil revenues declined.

Alex Coelho, the chief executive of state-owned Al Hilal Bank, which is currently the subject of three-way merger talks with Abu Dhabi Commercial Bank and Union National Bank, said that past examples in other countries of privatisation, “with very few exceptions”, showed that all of the stakeholders involved in the process benefited – governments, customers and investors.

However, he added that privatisations were initiatives set by government, who would continue to control the timing of any initial public offerings (IPOs) that would take place as a result.

“As much as market want a piece of the action either of GREs [government-related entities] or state-owned companies, the pace is dictated by government and regulators. It's not dictated by interests of the market. Look at the likes of Aramco - there's a huge interest in Aramco's possible IPO, with obvious reasons for that,” Coelho said.

Mazin Saad Al-Nahedh, group CEO of Kuwait Finance House, argued that the potential Aramco IPO would be “a huge step forward” for capital markets, and for government treatment of national oil companies (NOCs), adding that this would increase both the governance and transparency of these assets, as well as ensuring the private sector had a say in how they were run.

He argued that there “isn't a shortage of cash” to invest in local companies, but a shortage of good government investments.
Yadav said that the region’s sovereign funds hold $2.8 trillion worth of assets.

“The issue is not that there is no capital locally. The issue is a lot of this capital gets invested outside,” she said.

“If even 10 percent was to come back home, you're talking about $300 billion to get invested in the market.

She argued that although easing foreign ownership limits on certain companies was required to deepen international investor interest, “the lower hanging fruit is to stop the local capital going out”.

Panel members disagreed on whether local markets were transparent enough in terms of disclosures. Coelho said he felt the right infrastructure was already in place, stating that “you pretty much have every aspect of a developed capital market in the region”.

Yadav said that the quality of disclosures differs on a case-by-case basis. For instance, although airline Emirates is not publicly listed, the prospectus it shares with investors in its debt are “deeper and more meaningful than Qantas”.

“But, at the same time, we get some banks and other corporates that probably don't report as frequently,” she said, and added that Dubai’s sovereign fund, the Investment Corporation of Dubai (ICD), is an entity with less rigorous disclosures.

“ICD will give a quarterly presentation of six pages presentation and that's it, for borrowings of billions of dollars,” she said.

Al-Nahedh said that disclosures were improving, in part driven by regulators. One of a series of market reforms made in Kuwait this year, for instance, requires companies in the Premier Market segment to hold an investors’ call within seven days of producing its quarterly results.

“The level of information that we are providing we believe is good, but we are learning from the questions that are coming from investors,” he said.

(Reporting by Michael Fahy; Editing by Shane McGinley)
(michael.fahy@refinitiv.com)


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