x Abu Dhabi, UAEWednesday 24 January 2018

Gulf states keen to achieve 'emerging market' status

Focus: There is increasing anticipation in the financial communities of Abu Dhabi, Dubai and Doha ahead of next week's MSCI decision, writes Frank Kane.

Abu Dhabi - July 21, 2009: Traders inside the Abu Dhabi Securities Exchange. ( Philip Cheung / The National ) *** Local Caption *** PC0092-ADX.jpg
Abu Dhabi - July 21, 2009: Traders inside the Abu Dhabi Securities Exchange. ( Philip Cheung / The National ) *** Local Caption *** PC0092-ADX.jpg

There is growing anticipation in the financial communities of Dubai, Abu Dhabi and Doha over next week's decision by MSCI, the investment services provider of the investment bank Morgan Stanley, about "emerging-market" status.

MSCI is to decide whether the UAE and Qatar should be elevated from the ranks of "frontier markets", where they currently lie, to the category of emerging markets.

In the former, they keep company with Bangladesh, Mauritius and Slovenia; if they get elected to the latter, they will be in Bric-land, alongside such global economic giants as Brazil, Russia, China and India.

It's not just a matter of kudos, however. If the Gulf markets are given emerging-market status, it means that many international financial institutions will no longer be forbidden from investing in stocks on the Qatar and UAE exchanges.

Most analysts believe it would be a quantum step in the economic and financial development of both countries. It would in theory give them access to the US$450 billion (Dh1.65 trillion) of finance currently traded by emerging-market funds.

Qatar estimates anything between $1.5bn and $4bn of foreign investment. I haven't seen estimates from the UAE but they should be of similar magnitude.

So it's a big thing for the region. It's not such a big thing for the global investment community, however, and that could be one reason why both Gulf countries have been turned down twice already for emerging-market ranking.

The Japanese-owned bank Nomura estimates that if admitted Qatar and UAE between them would account for only 0.67 per cent of the index. Because inclusion in the index ultimately reflects the desires of global investors, as expressed to MSCI, perhaps they have seemed too small to bother about in the past. Inertia is a powerful factor, too.

But there are persuasive reasons the two should be admitted this time.

Recent speculation in Dubai had it that one or the other country might get promoted on its own, leaving the other on a "probation period" to fix any defects MSCI detected in its systems. This looks wide of the mark; Nomura for one believes Qatar and the UAE will stand or fall together in the emerging-market rankings.

Both have made progress towards meeting the criteria MSCI sets for membership. The UAE has introduced the "delivery versus payment" (DvP) system that is standard on all developed exchanges, which ensures the swift and efficient completion of a securities transaction. Nomura says the DvP system in the UAE is still "only partial", but the authorities are confident they have done enough to meet MSCI requirements, and that their systems will only improve with time.

Qatar has also introduced DvP, but has a problem with regards to foreign ownership limits for Doha-quoted securities. Under current law, only a maximum 25 per cent of a company's capital can be held by foreign investors, which is below the level MSCI and institutions feel is acceptable.

Despite hints the Government would rectify that situation quickly, before MSCI made its decision, no decree has been forthcoming. Recently, the head of the Qatar Exchange, Hussain al Abdulla, said there would be no increase in permitted foreign holdings this year, a decision he may rue if MSCI makes an issue of it.

Except in certain cases - usually with companies deemed "strategic" such as Etisalat and Emirates NBD - UAE law permits foreigners to hold up to 49 per cent of the shares of a business, which international investors seem happy enough with.

Sticklers will point to other reasons Qatar and UAE should not be allowed; neither has unified regulation, with a number of authorities in each country having a say in supervision and enforcement. But MSCI did not raise this as an issue last time, so it is unlikely to become one now.

Some analysts point to the apparent incongruity of the UAE having three exchanges for a comparatively small investment community but, again, MSCI does not seem to have a problem with it. Plans to unify the exchanges of Abu Dhabi and Dubai have in any case been prepared, under the auspices of investment bank Goldman Sachs. Perhaps MSCI membership would be the prompt to implement those as quickly as possible.

There is a darker fear lurking at the back of the minds of some officials in Qatar and the UAE: that institutional investors, watching the turmoil that continues to affect some parts of the Middle East and North Africa, will be deterred from pushing the case for emerging market inclusion.

If this attitude exists, it would seem short-sighted. For one thing, neither the UAE nor Qatar has experienced any social unrest whatsoever in recent months. They have been regarded as "havens" in the general chaos that has overtaken other countries.

More importantly, the further integration of the region into the global financial system appears to be exactly the recipe to encourage investment and reconstruction in countries such as Egypt and Tunisia, and avert further possible disruption.