Where developments in Arab capital markets are concerned, it has all too often been a case of one step forward, two steps back.
Volatile oil prices and constraints on government spending have been encouraging Arab states to open up their economies to private and foreign investors. But the leisurely pace adopted owes much to the deep cash reserves of these oil-rich economies – and also to the need to support legal and regulatory structures.
Across the region, there continues to be a diversification in financing sources and a deepening in the domestic capital markets, as less reliance is placed on government funding, especially for infrastructure development.
Demographic changes and industrial diversification are encouraging governments to look outside the region – increasingly, in the wake of the Taweelah power station privatization in Abu Dhabi, to the private sector.
Across the whole Arab world, the number of working capital markets has risen from five a decade ago, to 11 today and Gulf markets, which have, up to this point, been generally off-limits to foreigners, are now becoming increasingly aware of the need to attract both foreign and domestic capital.
But despite progress to date, there is still room for improvement – at present, around half of the $800 billion assets held by the wealthiest 350,000 Gulf nationals (some 2% of the region’s population), is held abroad. This is more than three times the combined market capitalization of the top-50 listed companies in the Middle East.
For international investors, the United Arab Emirates is the most exciting prospect going forward. The UAE has committed itself to overhauling its own regulatory structure, launching its own stock exchange and getting the massive Saadiyat Island offshore financial centre off the ground.
The launch of the Dubai Financial Market (DFM), following the promulgation of long-awaited legislation in March 2000, will have substantially boosted progress and confidence, and the Abu Dhabi floor is expected to be open by the year-end. A longer-term aim is to create an association of Gulf bourses.
The DFM is operating initially as a secondary market for equity in national companies, and is also responsible for making the stock market an accessible and properly regulated investment option.
When it finally takes place, the largest flotation to date in the UAE will be the huge Saadiyat Island IPO. Due for international and domestic listing, the deal was originally scheduled for May 1999, but has been regularly postponed since then. Driven forward by the Emirates Global Capital Corp (EGCC), the $3.3 billion Saadiyat Island scheme is, however, well under way – underlining Abu Dhabi’s plans to become a regional and global financial and trading centre.
Saadiyat, located just offshore from the emirate, is earmarked to become a major force in the global capital markets, tapping into the Gulf’s $1 trillion of capital, as well as another $400 billion of annual commodity trading.
The role of lawyers in these developments is particularly significant. One of the major disincentives for foreign investors considering the Gulf region has been the lack of transparency and effective market regulation.
As the EGCC states have increasingly come to appreciate the need for private-sector investment, however, so there has been a growing recognition of the need for watertight legislation in support.
In the past, the lack of any effective regulation has left investors prey to insider dealing and market manipulation. Where Saadiyat and the new UAE exchanges are concerned, the legal and regulatory frameworks governing these new markets have now been put in place.
Alastair McNair, a legal consultant secon-ded to Hadef Al Dhahiri&Associates by Clifford Chance (the principal advisers to Saadiyat), points out that the legislation is designed to be flexible, while encouraging international financial institutions to establish as branches, under the auspices of their home jurisdiction regulators.
The EGCC has been given a 50-year concession to develop this offshore centre and a commitment has been made to establish an international stock exchange and a commodities exchange within three years.
Where the onshore UAE market is concerned, there have been drafts of a new federal law for the creation and regulation of a stock exchange under discussion since 1996, with the 1996 draft anticipating the creation of an “Emirates Stock Exchange”. McNair explains: “The law was promulgated in early February and concerns the creation and operation of a securities and commodities authority which will license and regulate the operation of markets in securities and commodities in the UAE. It anticipates the creation of a number of stock markets – at the very least in both Dubai and Abu Dhabi.”
He continues: “The law addresses the particular circumstances of the UAE, and appears to set in place a sound structure from which to build.
“How successful this is will depend upon the quality and experience of staff recruited, both to the authority, and into the various markets, and the degree of support they are given in fulfilling the laudable objectives of the law itself. The next few years promise to be interesting ones in this whole area.”
For lawyers, too, these promise to be interesting times. Dubai and Abu Dhabi are the main centres of legal practice in the region, with easily the greatest concentration of international lawyers.
For historical reasons, these firms are principally from the UK, but there will inevitably be a growing number of US firms looking to move into the UAE marketplace.
Until recently, the comparative oversupply of lawyers in Dubai and Abu Dhabi has curbed any in-rush of foreign law firms. Indeed, many substantial US and UK firms have managed to secure important mandates without having to set up offices in the emirate. A good example of this is White&Case, which played a leading role in the landmark Taweelah A2 privatization. The firm has offices in Jeddah, Riyadh and Bahrain – but none in the UAE.
At the same time, particularly in Abu Dhabi, the policy of “emiritization” (an employment policy favouring UAE nationals) has made it harder to secure practice licences for incoming firms.
But as the offshore financial metropolis of Saadiyat rises from the waters off Abu Dhabi, it looks increasingly likely that more and more law firms will be eyeing up opportunities in the UAE.
Certainly, for those law firms looking to open offices in Saadiyat, the usual licence hurdles will be dispensed with, thereby considerably facilitating the entire process. Some 50 international banks have been invited to apply for licences and the presence of many more international law firms looks inevitable in due course.
