Kuwait: Improving marketability

Ahead of a planned privatisation of the country’s stock exchange, Kuwait’s Capital Market Authority (CMA), has been stepping up efforts to ensure listed firms are fully in compliance with a tightened regulatory regime, while at the same time providing transparency and accountability.

At the beginning of 2012, it was announced that the Kuwait Stock Exchange (KSE) would itself go public, with international bank HSBC tasked with overseeing the transformation. As part of that process, the CMA and the exchange have been moving to improve the KSE’s brand, including refining trading regulations, and strictly enforcing reporting and transparency requirements.

While regulators have shown patience and a degree of latitude towards companies adapting to the new, more stringent regime, the CMA and the KSE have made clear that latitude is being replaced by attitude. In late March, the KSE said it was considering suspending trading in the shares of 67 listed firms – well over 25% of the total number of companies on the exchange’s boards – if they failed to lodge their final end-of-year financial reports by April 1. According to the exchange, some two-thirds of the companies had not set a date as of March 29 for board meetings to discuss financial results.

In mid-May, a number of companies were suspended from trading after they violated a requirement to declare their financial results for the first quarter within 45 days. In one of the most recent instances of tighter reporting compliance, the CMA warned it would delist finance firm Global Investment House unless the company provided information that it was remedying financial problems by September 30.

While some may see the steps being taken by the CMA as harsh, they will result in a leaner and better-regulated exchange. This in turn will make the KSE itself a more appealing prospect for investors when the bourse goes public, while at the same time instilling fiscal discipline in listed firms, adding to their own appeal for potential investors.

Efforts to strengthen the market and boost investor confidence may be paying off. The KSE has seen an increase in activity in the first half of this year, with $15.3bn worth of shares traded up to the end of June – 18% up on the daily rate of trading in the same period of 2011 – when there was just $22bn of deals done across the entire 12 months.

However, while this increased level of investor interest is encouraging, even if the KSE maintained the same rate of activity through to the end of the year, the total would still fall well short of the $44bn worth of trade in 2010, or the $75bn the year prior, according to a report issued by NBK Capital in early July.

Also, there is a strong chance that the more traditionally quieter summer term, which this year coincides with Ramadan, may see a decline in demand. Additionally, in a report issued on July 28, brokerage firm Al Oula said that many major investors were adopting a cautious approach ahead of the release of second-quarter results, reinforced by concerns over regional developments.

In an earlier report, the company said that trading would likely remain within a limited range throughout the rest of the summer unless the government stepped in, though state investment agencies would probably maintain their own careful position in the shorter term.

Adnan Al Dulaimi, a financial analyst, agreed with the Al Oula assessment, telling the state news agency KUNA on July 25 that investors have become more wary of dipping too deeply into the market. Along with the volatility in the global economy and oil markets, Al Dulaimi said that traders are waiting for first-half results and to see how the political situation in Kuwait would impact on the economy.

It will likely be later in the year before a fair assessment of trader sentiment can be made and how well listed firms respond to the CMA’s stricter policies. However, what is certain is that the KSE will likely be a more open and accountable institution when its own shares are listed.