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08 December 2023

GCC regulatory reforms critical during crisis


By Shuchita Kapur

Regulatory reforms will go a long way in instilling investor confidence and will attract more investments to the GCC, say experts.

The present levels of regulations in the region do support growth but there is enough scope for improvements and reforms that can improve the economic performance of the region. This becomes all the more vital in the current financial scenario, when investments are falling and investors are becoming more discernable.

"The last six months have underlined that international investment now operates in a global market, transcending national boundaries. Investors are more than ever comparing jurisdictions as to the safest and most secure environment, and high and effective standards of regulation and corporate governance are increasingly seen as key assets in attracting investment. A stable and certain system of regulatory standards and safeguards is becoming an essential, rather than a 'nice to have'," said James O'Shea, Partner at Clyde & Co, a leading international law firm in the region.

Muhammad A Al Harith Sinclair, Partner, Finance & Projects, DLA Piper Middle East, agrees: "What investors look for in times of uncertainty are transparent, well regulated markets where the traded values of investments are likely to be an accurate reflection of their actual value. Regulation is important because it ensures transparency. Transparency is important because it prevents nasty surprises later on. In other words, transparency is the backbone of investor confidence."

The developments made by the region on this front are commendable but a lot more needs to be taken into consideration to ensure better environment for businesses.

"The GCC states haves taken enormous strides in the last five years which have demonstrated their determination to create a world-class environment for international investment. Part of the vision of the GCC states has been, and continues to be, a stable and well-regarded corporate governance system," said Shea.

"In the region as a whole, some of the regulatory frameworks need more attention and boards of directors sometimes fail to grasp how important, in the new era, perceived transparency and high standards of governance actually are in building shareholder value," he added.

Sinclair believes regulations in the region are inadequate to a certain level. "By and large there is currently inadequate regulation in most GCC markets. In many GCC states, there is a lack of proper modern anti-corruption law and enforcement. International anti-corruption conventions have been signed up to, but have not been implemented into these states' laws. In the financial sector, central banks in some key GCC states are understaffed and undertrained in modern regulation. Day to day, they have very little impact on how the GCC's financial institutions are run," he said.

Recently, Kuwait Financial Centre (Markaz) measured GCC capital markets in terms of regulatory progress by evaluating them on three factors – presence of an independent regulator for capital markets, institutional participation in the stock market and foreign investment. It deduced that GCC markets continue to be at an infancy stage when it comes to regulatory perspective and loopholes remain.

According to Markaz, the presence of a Capital Market Authority is vital in all the member states but out of the six GCC markets three of them still have not put it in place. "This we believe has higher negative impact in current circumstances leading to several imitation including information disclosure, corporate governance and market ethics," it said.

The level of institutional investment shows the sophistication of investors in a given country. On the institutional investment front – the second criterion of Markaz – all GCC countries rank very low and the rates range from 0.1 per cent to a maximum of four per cent. Global averages, on the other hand, for developed markets would be higher at 70 per cent, while that of emerging markets would range between 10 per cent and 25 per cent, according to Markaz.

Due to the low institutional investment rate, GCC is losing out money. According to Sinclair, GCC countries are not one of the main destinations of international institutional investment.

"This is partly due to the relatively small number of large publicly traded companies in some GCC countries such as the UAE. This is compounded by restrictions on the percentage of foreign ownership of companies. Finally, lack of transparency as to how companies in the GCC are run and regulated leads to greater caution from institutional investors," he said.

"This region has managed to attract significant capital follows and to stimulate intra- regional flows. Although it is on investors' radar in a globally significant way, some perceived risk factors hold back realisation of the full potential that exists here," said Shea.

The region scores better on developments made to attract foreign investment.

"It is heartening to note that almost all the GCC markets have opened up to foreign investment in some way or other. Saudi Arabia last year opened its once closed markets to foreigners via swap agreements. This has raised the foreign inclusion factor in each of the markets as measured by MSCI. Kuwait and UAE continue to rank the highest when it comes to foreign inclusion factor at 43 per cent and 45 per cent, respectively," said Markaz.

Having made progress on this front, the need is to increase it further. Shea recommends those in the region should keep a close eye on global changes in regulatory standards. "A dialogue between the regulated and the regulators about what is appropriate here is essential. This is why Clyde & Co is sponsoring, with the London Stock Exchange, a series of high-level round table discussions for regional decision makers to discuss these issues in a frank and open way," he said.

Sinclair outlines some factors, which if improved, will ensure more flow of foreign money into the region.

"Foreign investment can be increased by lifting restrictions on the percentage of foreign ownership of companies. Equally, strong compulsory rules of corporate governance, backed by tough laws and tough enforcement by professionally trained regulators will increase transparency. If foreign investment is unrestricted and investor confidence is promoted through properly regulated markets, there is no reason why foreign investment should not increase."