Regulatory reform in Oman set to boost exchange

20 July 2010

The Muscat market regulator is using the downturn to amend key trading laws and finalise approval of new products to attract foreign investors and boost liquidity

Oman in numbers

83 per cent: Drop in the value of initial public offerings in the Middle East and North Africa in 2009

$390m: Value of the stabilisation fund set by the government to support share prices

$260m: Value of bonds issued by the central bank

Sources: Ernst & Young; Muscat Securities Market

The Muscat Securities Market (MSM) has fared relatively well during the global financial downturn compared with its GCC neighbours.

The market capitalisation of the MSM grew 17.05 per cent in 2009, making it the second-strongest performer in the region after Saudi Arabia’s stock exchange, the Tadawul.

We continue to be weighed down by negative sentiment because of what is happening globally

Ahmed al-Marhoon, Muscat Securities Market

The rise was five percentage points higher than the GCC average of 11.89 per cent. The total volume of shares traded on the MSM in 2009 rose 45.07 per cent, compared with a regional average of 16.5 per cent. 

So far in 2010, MSM is the third-best performing bourse in the Gulf, with its market capitalisation having fallen just 2.38 per cent since January. The Doha Securities Market has dropped by 1.12 per cent, while the Tadawul has been the lead performer with a decline of only 1.07 per cent.

We are now in the process of setting up the infrastructure for a deeper debt market in the sultanate

Yahya bin Said al-Jabri, Capital Market Authority

The Dubai Financial Market (DFM) has suffered the most among the region’s exchanges, recording a drop of 17.82 per cent in value since the start of the year.

Low liquidity in Oman

“We have been less affected than other exchanges in the region,” says Ahmed al-Marhoon, director-general of the MSM. “But we continue to be weighed down by negative sentiment because of what is happening globally.”

The MSM has undoubtedly suffered during the global economic crisis. The exchange lost half its value between mid-June and late October 2008, sinking to below 6,000 points, from a high of more than 11,000. Today, it stands at 6,220 points.

The sharp correction was largely prompted by the sudden exit of hot money, which had been pouring into the region in anticipation of a revaluation of GCC currencies. In the wake of the US sub-prime mortgage crisis, international investors rushed to withdraw their money. 

The correction was exacerbated by the exchange’s low liquidity. As one of the smallest regional bourses in terms of market capitalisation, the MSM is often subject to a herd mentality among its traders. This works in its favour when there is a bull market, but proves costly when the tide turns. The result was Oman’s first real bear market since 2000.

In an effort to contain this volatility, the government established a $390m stabilisation fund in January 2009 to boost falling equity prices on the exchange through investment in securities. Al-Marhoon credits this as being “an important step in helping to stabilise the market”.

The Capital Market Authority (CMA), the exchange’s regulator, in July 2009 amended regulations to convert the MSM 30 index to a free-float index from a full-float market. The change refers to the method of calculating capitalisation weight on the index and resulted in a significant adjustment in portfolios by major investors. The amendment was a key factor in the high market volumes recorded in 2009. The downturn also put a lid on what looked set to become a burgeoning initial public offering (IPO) market, following the listing of the local Galfar Engineering & Contracting in September 2007. The listing was the most heavily subscribed IPO in the history of the MSM, after being 14.5 times oversubscribed. 

Four major Omani companies – Hasan Juma Backer Trading Contracting, Oman Merchant Bank, Alargan Towell Investment Company and Barr al-Jissah Resort all shelved plans for IPOs in 2009 due to weak market conditions.

Family business incentive to go public in Oman

Not a single IPO launched on the MSM in 2009. This was part of a wider regional trend, with the total value of IPOs in the Middle East and North Africa falling 83 per cent in 2009, according to a report by consultancy firm Ernst & Young.  

Only two companies are expected to float on the Muscat exchange in 2010. 

Family-owned industrial conglomerate, Al-Khalili Group is planning to sell off a 40 per cent stake, the IPO’s appointed lead manager, Oman Arab Bank, said in January. 

Meanwhile, Nawras, the Omani unit of Qatar Telecom must also float 40 per cent this year as part of its original licence agreement.

“I hope these IPOs will materialise in the final quarter of this year,” says Al-Marhoon. “Other companies are studying the possibility, but the timing is not encouraging because markets everywhere are very quiet.”

Oman is studying the possibility of reducing the percentage a family-owned company has to offer to go public to 25 per cent from 40 per cent. The law is in the final stages of being approved by the Commerce Ministry and the CMA, and should be passed before the end of the year, Al-Marhoon says. 

“We expect it will give some incentive to family-owned businesses to think of going public because the fear of some family-owned businesses is the control element,” he says. “We need to make them realise that transparency is in their own interest. Going public will let them know how much their company is worth and they can gain access to that wealth by liquidating some of their shares.”

As the IPO market has been sluggish, Al-Marhoon says there is now a greater emphasis on rights issues. “We have been seeing some investors buying or increasing their shares in some companies to take advantage of the low prices.”

For the past few years, the MSM has been working on introducing exchange-traded funds (ETFs), a fund that tracks an index but can be traded like a stock.

Inevitably though new product launches have been postponed and broader market plans have come to a halt in response to the change in economic climate.

Trading funds

“Things haven’t happened in the time frame we would have liked because of the crisis,” says Al-Marhoon. 

The exchange now expects to launch its first ETF before the end of the year.

“We are in discussions with a foreign, private company about introducing an ETF,” says Al-Marhoon. “We have reached an advanced stage with regard to the regulations and we are fairly optimistic that the fund will launch in the final quarter of the year.”   

The exchange has also been trying to breathe new life into its debt market, which also came to a standstill over the past couple of years. To encourage bond issuances, the MSM reduced the interest rate on corporate and government development bonds from 0.1 basis points to 0.05 basis points at the end of 2008, both for brokerage firms and the MSM. But even this minimal rate has failed to encourage the purchase and sale of corporate bonds.

However, at the end of June, the Central Bank of Oman announced plans to issue five-year development bonds valued at RO100m ($260m) at a 4 per cent coupon rate.

The bonds were open for subscription between 28 June and 15 July, but had not yet been issued at the time of MEED going to press. The bonds will mature on 26 July 2015.

“We are now in the process of setting up the infrastructure for a deeper debt market in the sultanate,” says Yahya bin Said al-Jabri, executive president of Oman’s CMA.

“The government has been working in cooperation with the World Bank to develop the main pillars of this regulation. We hope that we will be able to apply it in the near future.”

Efforts to improve foreign investment on the Oman bourse have seen the MSM enter into a partnership with the US’ Dow Jones Index to launch a co-branded index in January 2008. Under an agreement signed in May 2007, Dow Jones Index drew up a strategy covering the development of the Dow Jones-MSM composite index and the Dow Jones-MSM Blue Chips index.

A few years ago, the CMA also introduced a law to raise the ceiling on foreign investment. Today, foreigners are allowed to own up to 70 per cent in a company and sometimes up to 100 per cent if it is a direct investment.

“We have amended regulations to try and attract a greater number of non-GCC institutional investors onto the exchange,” says Al-Jabri. 

Foreign ownership on the MSM stood at 23 per cent at the end of June. GCC investors comprised 15 per cent of this, with non-GCC investors making up the remaining 8 per cent. 

“The debate about how to boost liquidity has raged for years and has featured some contentious ideas such as allowing investors to short sell stocks or more exotic securities, like derivatives,” says Al-Jabri.

The raft of new legislation currently being approved and the introduction of financial instruments are all aimed at boosting liquidity on the MSM. The exchange is cautious about introducing riskier and more sophisticated products to the market in the current climate. But increasing the number of investors, shares, trading instruments and overall activity on the exchange will be crucial to ensuring its future evolution.

Of the MSM’s 136 listed companies, only around 40-45 are actively traded on a daily basis. Within these, trading is dominated by five companies – Bank Muscat, state telecoms provider Omantel, Raysut Cement Company, Galfar and Renaissance Services. The stocks of these companies accounted for slightly more than 20 per cent of total trading volume between July 2008 and July 2009.

“Trading is concentrated in just a few companies because of their large capitalisation and higher liquidity, which is why investors are attracted to them,” says Al-Marhoon. “We want to see more companies listing to reduce their domination.”

Summer lull

In the short-term, Al-Marhoon says the MSM’s recovery will be helped by positive half-year financial results for the sultanate’s listed companies.

“Companies will shortly begin announcing their financial results and what I’m hearing from analysts is that they are expecting a good performance. If that is the case, it will help lift confidence in the market and boost demand,” he says.

However, regional markets will be restrained by the summer lull and Ramadan, due to start on 11 August. For this reason, it is unlikely there will be any solid activity on the MSM until at least mid-September. 

Furthermore, a bearish sentiment prevails in light of tight credit markets, fears of contagion from the Greek debt crisis, and growing concerns about a double-dip recession in the global economy.

Given that the pronounced swings the MSM has experienced in the past two years have been driven primarily by negative sentiment rather than economic fundamentals, these factors darken the outlook for the exchange. 

Fortunately, the CMA has earned a solid reputation for high standards of corporate governance and regulatory oversight. It has been using the economic downturn to remove constraints in the current legislative framework, as well as to amend some key laws and finalise approval on new instruments. As a result, the MSM is well positioned to capitalise on new opportunities if the markets start to stage a comeback.

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