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07 December 2023

Arab markets need greater transparency to restore confidence

An official addressing the 2010 Securities and Regulatory Authorities Summit in Abu Dhabi. (SUPPLIED)

By Nadim Kawach

Gulf oil producers and other Arab countries need to enact new legislations to enforce stronger transparency and governance in their capital markets to restore investors' confidence that has been shattered by the global financial distress.

Regional stocks regulators and economists made the call at an equity conference held in Abu Dhabi to celebrate the 10th anniversary of the UAE's Securities and Commodities Authority (SCA) and discuss post-crisis markets in the region.

The SCA marked the occasion with a pledge to fully enforce transparency and governance regulations, while an official from the Organisation of Economic Co-operation and Development (OECD) was upbeat about investment prospects in the region and expected stronger implementation of governance.

In a paper presented at the two-day conference, Fadi Khalaf, Secretary-General of the Union of Arab Stock Exchanges, said global market had witnessed a quarter-century period of growth from 1982 to 2007, accompanied by the "excessive desire to acquire, possess and take risks of individuals and corporates".

Dear price

"We have paid dearly for these errors, and the point to be noted here is that we should learn from our mistakes to avoid recurrences," he said. "The financial crisis seems to have impacted the confidence levels of investors as well. Strong evidence of this was apparent in the situation of some investors who sold their investments in bankrupt companies to buy government bonds. The governments, in turn, invested the capital raised from these bonds to bail out those insolvent firms. In other words, the investors lost their confidence in capital markets, and the government became the safe destination of their investments."

Khalaf said investment in government bonds did generate good income, but added public confidence in the regional markets remained low.

"Something that was imperative to understand at this point in time was that confidence was the most important factor in capital markets, and the confidence, which may be established over years, can be shattered in a few days," he told the more than 100 participants in the conference.

"The major question that set us thinking was 'how do we regain the confidence in the hearts of our investors for our capital markets?' Without doubt, it was clear that we required more surveillance, disclosure and transparency."

Khalaf said what is needed at this stage is a set of measures to be adopted by those in charge of market management in time of crises. He said implementing such measures would prevent hasty reactions and improper decision-making in time of crises. "To strengthen our image again, we need new and improved legislations to negate our pitfalls, and it has to be well implemented. It is unfair that the responsibilities lie solely on the shoulders of the public sector regulatory bodies. We believe that the supervisory role of the private sector should be strongly emphasised as well," he said.

Auditing role

Khalaf stressed that auditors have a strong role to play, and so do the crisis management team in Arab and international banks, especially after the issuance of the Basel II recommendations on banking laws and regulations.

"Some relevant questions are also raised here. Was the role of crisis management in some banks limited only to covering the practices of general management or was it also to confront these practices? What is the procedure of awarding a rating to a firm? Lehman Brothers was rated 'A' by a rating agency, while the bank was filing for bankruptcy," said Khalaf.

"The big question now is: how would these companies in the private sector manage active roles while they are funded by the client they are monitoring? Therefore, all-inclusive mechanisms are required to ensure these clients are monitored independently and strong corporate governance is guaranteed."

Poor governance

Addressing the meeting, a senior economist at the Dubai International Financial Centre Authority (Difca) blamed lack of governance for the crisis and called on Gulf regulators to enforce better practices in governance and transparency.

"It is now widely recognised that the underlying problem of financial crisis was from governance, with failures occurring at the senior management, board and regulatory and supervisory levels," Nasser Saidi said in a working paper. "Learning from the financial crisis, Gulf regulators need to ensure effective implementation in three key areas: transparency and disclosure, risk management and board practices."

He noted that while capital market authorities in the Gulf Co-operation Council (GCC) have issued their own corporate governance codes – including the UAE's corporate governance code issued by the SCA which takes effect in April this year – regulators need to also focus on implementation.

He stressed that mandatory corporate governance standards need to be effectively enforced by regulators through mechanisms such as the development of dedicated corporate governance departments that will monitor and ensure compliance in the entities they are supervising.

"We also need to ensure our boards comprise capable and competent professional directors who understand that corporate governance is not only about regulatory compliance and 'box ticking' but also about value addition to the companies and markets," said Saidi, a former Lebanese economy minister.

Similarly, he added, regulators themselves need to ensure they are both transparent and accountable, their responsibilities are well defined and not conflicted, they are not subject to political intervention or "regulatory capture" and they are staffed with competent and experienced personnel.

"In the end, we need to acknowledge that the markets that will fare the best are those in which fundamental investor concerns are identified and addressed by the regulators and companies alike."

Another speaker said the global crisis has resulted in a review of the adequacy of existing regulations and regulatory structures for the financial services industry. Paul Koster, Chief Executive of Dubai Financial Services Authority, said international regulatory standard setters such as the International Organisation of Securities Commissions, the International Association of Insurance Supervisors and the Basel Committee on Banking Supervision have spent considerable time over the past year devising proposed regulatory changes for public consultation.

"It is very beneficial for us to work together to proactively inform those deliberations and consultations. When revised standards are finalised, we can collaborate on how to implement them most effectively with respect to markets and firms we supervise. This will enhance the pace and credibility of regional capital market development," he said.

SCA strategy

Highlighting market achievements in the UAE, SCA outlined a new strategy which, it said, would focus on stronger governance and transparency by listed firms to bolster investors' confidence and stimulate trading.

SCA's Chief Executive Officer Abdullah Al Turifi said there is a need to push ahead with plans to better organise the local equity markets within a long-term development strategy devised by SCA and each bourse in the UAE.

"We are in the process of following up the full enforcement of the governance regulations for listed firms and could also amend some of the SCA laws so that they can cope with the latest changes in the market," he said. "We will make sure all rules relating to governance, transparency and other activities in the market are fully implemented although we have faced some challenges and difficulties in enforcing such regulations in the beginning. In this respect, some companies had hesitated in accepting such rules, but they began to gradually comply with them. Now, we have almost 100 per cent transparency, while all listed companies are gradually adhering to governance rules."

Shattered confidence

Official figures showed dealers' confidence in regional markets has been severely hit despite occasional improvement in share prices and capitalisation.

The figures released by the Abu Dhabi-based Arab Monetary Fund (AMF), which tracks regional bourses, showed the collective turnover of the official Arab stock exchanges plunged by nearly $324 billion (Dh1.18 trillion) to a five-year low of $567.8bn during 2009 from $891.9bn during 2008.

The 2009 turnover was nearly half the value in 2007, and just more than a third of the peak value of $1.59trn recorded in 2006.

All exchanges recorded a large fall in turnover last year, but the bulk of the decline was in the bourses of the six-nation Gulf Cooperation Council, given their relatively high capitalisation and value of traded shares.

The AMF data showed investors' confidence was gradually returning to markets but at a slow rate, with the market capitalisation in the region rising by around $85bn through 2009 after tumbling by nearly $525bn in 2008. About $325bn of the loss occurred after the eruption of the crisis in mid-September in 2008.

Good Mena prospects

"Investment prospects for the coming years are promising for the Mena region as a result of recovery, expected rises in commodity prices, accumulated wealth and above all significant investment opportunities," Rainer Geiger, Head of OECD-Mena Investment Programme, told the SCA conference. He said investment trends would be particularly strong in selected growth sectors with yet unmet demands such as renewable energy, clean technology and infrastructure. Sovereign wealth funds are expected to renew their interest in intra-regional investment, while public/private partnerships – combining private capital and know with public investment – will be strong drivers for development.

"Corporate governance of financial institutions and regulatory frameworks will be strengthened following recent recommendations established at regional and international levels. In this context, Islamic financial institutions will expand their role in the financing of the real economy, if they apply sound risk management practices and investor protection is sufficiently guaranteed," said Geiger.

Clean system

Another speaker at the conference said confidence is gradually returning to Arab markets, but stressed the need for, what he termed, a "clean" financial system. Bassam Saket, Executive Chairman of Jordan Securities Commission, described the current stage as that of a "flagging economies and labouring recoveries".

"It is good to clean-up after crisis, but better to take more preemptive actions. Today, the financial world is aiming at cleaner financial state of affairs [clean of abuse and corruption plus clean of toxic securities and having straight corporate ethics and clean and regulated rating agencies," he said.

"Abuse should be encountered not only by fines but it should also lead abusers to lose their freedom. Fines should not be accepted as a cost of doing business.

"The state of our economies is a concern that rises above all others. Too often short-term gains were prized over long-term prospects. 'Me first culture' should not be our motto, because financial markets are interdependent and can have spill-over effects inside, and the crisis can easily cross borders and be contagious. Actually, it was realised that swine flu is another example of world interdependence and interconnectivity."


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