Speakers at MEED's excellent and well attended Capital Markets conference in Dubai in mid-September called time and again for more rating of companies and securities to promote local stock exchanges. Most said that Moody's Investors Service and Standard & Poor's (S&P) should step up their activities in the Middle East.
Fat chance. There is less activity by USrating agencies in the region than there was a decade ago, when Moody's and then S&P turned their attentions to the Middle East for the first time. Moody's took the approach of setting up a team in Limassol drawing mainly on people already active in the region. Its efforts were, however, counterproductive. Aggressive sales tactics, particularly in Saudi Arabia, alienated some of the most important financial institutions in the Arab world. Its business failed to flourish and Moody's has now lost most of its original team. S&P was more cautious and diplomatic, but this firm too is less than fully active in the region. Fitch, the UK rating agency, is now the most prominent international rater. The focus by its London-based team is principally on the bank market. The lack of interest of the big three is in part due to a crisis of confidence about the role of the rating agencies since the Asian financial collapse and the Enron scandal. This has raised issues about how rating agencies finance themselves. Who should pay for the service? The rated bank or company or the institution seeking credit information? This question has still not been satisfactorily answered. Limassol-based Capital Intelligence, the only rater which has a regional shareholding interest, has worked hard for two decades to establish itself in the market. Its reports are well regarded, but it cannot claim to match the influence of the big three. Like Moody's, its location no longer makes sense. If anyone wants to be serious about doing ratings in the Middle East, they should be based either in the UAE or Bahrain, not in Cyprus. Attempts have been made in recent years to set up a locally-based rating agency owned by regional investors. None of them have got off the ground. The establishment of the Dubai International Finance Centre (DIFC) and the passing of the Saudi capital markets law may make it easier for such an initiative to work. I doubt it. Wherever a rating agency is based and however it is owned, the big issue is who pays for the service and how can ratings ever be objective when an agency's income comes from sources that have a vested interest in the outcome of that rating? 1So I was fascinated by a suggestion made to me by Fahd al-Mubarak, Saudi businessman and member of the Majlis al-Shoura, who spoke at MEED's conference. His idea is that the cost of the agency should be financed from the fees paid by listed companies to the regulatory authorities. In Saudi Arabia, this would be the new Capital Markets Authority headed by the admirable Jammaz al-Suhaimi, which should go active by the end of the year. Effectively, of course, this would amount to a government subsidy since such a measure would divert money from the state to the rating agency. However, it would provide at least an element of independence. Above all, it would provide the cushion of money that could allow the new agency to be free from the commercial pressures weighing on the established players. It is probably too soon to expect the GCC to set up an agency for the whole region. But locally owned and managed entities serving, initially, the markets in Kuwait, Saudi Arabia and the UAE, where the volume of share trading is the highest, would be a good first step. This would allow the acquisition of the skills and experience that a genuinely effective rating agency needs. In due course, a GCC body could be formed drawing on the existing national agencies. A Middle East rater could then be launched. This will tak