Qatar examines equity options
With a plateau in natural gas production and the MSCI upgrade from ‘Frontier’ to ‘Emerging’ market, Qatar will necessarily have to look for options of broad basing its economy by listing more companies on the Qatar Exchange (QE) with the intention of producing a viable second market on the QE. But that will require regulatory reforms, including institutions within the Qatar Financial Centre (QFC).
Aside from the fact that Qatar’s oil and gas sector grew by a meagre 0.8 percent in Q1 of 2013, as natural gas production reached a plateau, highlighting again the necessity to diversify its economy away from the hydrocarbons sector, there are two other key reasons why Qatar needs to develop its domestic capital base as quickly as possible. First, according to Qatar’s General Secretariat for Development Planning (GSDP), in Doha, projects worth more than USD29 billion (QAR105.6 billion) are expected to be awarded this year, adding to the USD27.5 billion (QAR100.1 billion) pledged already, bringing the total to an estimated USD56.5 billion (QAR205.7 billion) in 2013, twice the value of contracts awarded in 2012. And second, even more directly, as part of the understanding that the Qatar government has with Morgan Stanley Capital International (MSCI), QE will broaden and deepen its capital base ahead of its upgrade in re-classification from ‘Frontier’ to ‘Emerging’ Market status with effect from May 2014.
In the case of the former, Qatari banks are already heavily leveraged on their balance sheets, the onus for meeting new infrastructure spending will have to be more apportioned to other sources, Chiradeep Ghosh, senior Middle East equities analyst for SICO Investment Bank, in Bahrain, told The Edge. Indeed, he estimated that total lending by Qatar’s banks now represents around 125 percent of deposits, implying that they are dangerously reliant on short-term borrowing from other domestic banks, the sort of debt profile that prompted the collapse of Lehman Brothers on September 15, 2008. All the more worrisome, highlighted Saleh Al Nabit, secretary general of the GSDP, in Doha, as, “Delivery of a large number of big projects in a confined geographical space poses challenges and, unless well-executed, could have adverse effects for businesses in the rest of the economy.”
Capital markets base
By far the most cost-efficient execution sourcing of capital for such projects would be from an expansion to a well-functioning capital markets base in Qatar, highlights Michiel Visser, partner at White & Case, an international law firm, in Doha, with an increase in the number of listings on the QE from the current 42 firms, and a current aggregate market capitalisation of around USD145 billion (QAR527.8 billion). To this end, a range of new regulations is being introduced with the intention of producing a viable second market on the QE, and doubling the number of companies listed on it within the next five years.
Reform areas include new mergers and acquisitions rules for listed companies and a frame for more broad-based margin trading.
Among these new reforms will be a set of laws aimed at increasing company transparency through improved reporting guidelines (continued implementation of updates to the international Anti-Money Laundering Law and aligned to the Financial Action Task Force by the Qatar financial authorities) and improved accounting procedures. This would be more akin to the UK’s Generally Accepted Accounting Principles (GAAP) – model than the current International Financial Reporting Standards (IFRS) model used largely in Qatar. Finally, ongoing efforts to improve the country’s ranking in Transparency International’s ‘Corruption Perceptions Index’ (Qatar came in at equal 27 with the UAE, out of 174 nations).
Rise in public expenditure
Qatar’s public expenditures have jumped to over 160 percent during the period 2008 to 2013, to USD683 billion (QAR2.4 trillion), and set to go even higher ahead of the 2022 World Cup in Doha, said Zain Al Abdin Sharar, director of legal affairs and enforcement at the Qatar Financial Markets Authority (QFMA).
The areas include new mergers and acquisitions rules for listed companies, a framework for the introduction of more broad-based margin trading and for the listing of real estate investment funds. This latter change, Deloitte said, will serve as a major boon for real estate developers and construction companies in providing additional capital to meet the significant pick-up in demand for affordable properties in the run-up to 2022 World Cup.
Ahmed Jassim Al Jolo, chairman of Qatar Society of Engineers, in Doha said, “The country is not likely to witness a severe shortage of residential space in the short term, but a situation close to what existed during 2006 to 2007 may arise again, when work on new projects go in full swing, attracting huge number of foreign workers to the country.” These new rules would augment the new guidance for internal audits for QFC insurers, QFC banks, and QFC Islamic banks that commenced on July 1, 2013, and for requiring the governing body of a QFC-authorised firm to approve and establish a formal governance framework, risk management and internal controls framework, and remuneration policy.
New rules for financial adequacy for financial service firms will shortly be introduced by the QFMA to bring Qatar into line with the increased Tier 1 capital ratios being implemented globally under the Basel III directive. (Image Reuters/Arabian Eye)
It is also expected that new rules for financial adequacy for financial service firms will shortly be introduced by the QFMA to bring Qatar into line with the increased Tier 1 capital ratios being implemented globally under the Basel III directive, commented Bernard Barbour, head of legal and shari’ah business for QInvest, in Doha. This would include a minimum of seven percent of a bank’s risk-weighted assets being Tier 1 to act as a buffer against losses (compared to the two percent required under Basel II), the implementation of the tighter definition of what liabilities can be classified as core Tier 1, and the necessity for maintaining a counter-cyclical buffer of 0 percent to 2.5 percent, which is to be built up when the economy is strong so that it can be called upon in tougher times.
Central Bank initiatives
Concomitant with this development of the QE directly, though, is to be the broadening out of the capital markets more generally, highlighted in September by Qatar’s Central Bank issuing QAR3 billion worth of local currency government bonds and a QAR1 billion sukuk, as part of the government’s new debt markets strategy, begun in March, of having quarterly government bond sales, including both conventional and Islamic bond offerings. Indeed, as has been evident for some time, but having fallen by the way with some high-profile failures in the sector (most notably perhaps the Goldman Sachs Malaysia sukuk debacle), Islamic banking and sukuk issues – if handled properly, according to the basic tenets of shari’ah finance – could well afford the Qatari government a valuable adjunct money-raising strategy to augment its lackluster capital markets one.
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