How will strengthened regulatory framework to Kuwait's capital markets

While many established global stock markets have seen mixed performance in recent years, Kuwait’s have shown positive gains – highlighting the robust nature of its capital markets. With an economy backed by rising oil prices and a solid, well-capitalised financial sector, the country continues to see international investor interest grow. Indeed, its benchmark indices recorded positive performances throughout 2021 and were among the best-performing markets in the Gulf region, according to a January 2022 report by Kuwait-headquartered asset management company KAMCO Investment Company.

A stronger regulatory framework has been created, while new products and financial technology (fintech) developments have helped the country’s capital market recover rapidly from the economic impact of the Covid-19 pandemic. Further regulatory reform, more listings and the expansion of a wider bond and sukuk (Islamic bonds) market are in the pipeline, as the financial sector looks to capitalise on Kuwait’s strong economic performance amid global uncertainties.

Structure

The Kuwait Stock Exchange (KSE) was established in 1983, following the collapse of the then-unofficial market, Souk Al Manakh. In 1986 the KSE appointed Kuwait Clearing Company (KCC) as its sole clearing and settlement agency, after which a sustained period of reform and development followed.

In 2014 Boursa Kuwait, a private company, was established to take over as the operator of the KSE. This took place via two-stage privatisation. In the first stage, which took place in February 2019, a consortium of the Athens Stock Exchange and three Kuwait-headquartered companies – Arzan Financial Group, First Investment Company and the National Investments Company – successfully bid for a 44% stake. In the second stage, which took place in December of that year, Kuwaiti citizens were invited to purchase a part of a 50% stake held by the sector regulator, the Capital Markets Authority (CMA), seeing an over-subscription rate of 850%. As of late 2022 Boursa Kuwait was the only fully privately owned stock exchange in the Middle East, self listing in September 2020. In 2021 the exchange facilities underwent renovations, reopening with a new trading floor in January 2022.

The exchange publishes four indices on a daily basis: the All-Shares Index, which lists all the companies doing business on the exchange; the Premier Market, which consists of companies with high liquidity, and medium to high capitalisation; the Main Market, which features companies that meet the minimum liquidity requirements, as established by the CMA; and the Boursa Kuwait Main Market 50 (BK Main 50), which includes the top-50 liquid companies in the Main Market. The exchange also provides a platform for trading real estate investment trusts (REITs). The indices are divided by sector, with the All-Share Index listing 13 sectors.

Oversight

The CMA was established by Law No. 7 of 2010, which sets the regulatory framework for the entire sector. Amendments to this law were issued in July 2014 and May 2015. The law states that the CMA is an independent authority under the oversight of the Ministry of Commerce and Industry.

The CMA completed updating its executive by-laws in 2021 and established a unified code known as the CMA Handbook. This also contains rules on the establishment of special purpose vehicles (SPVs) to act as issuers of debt instruments, along with regulations on financial trusts designed to structure sukuk.

The authority’s regulating body is the Council of Commissioners, which has the power to issue licences, create by-laws, regulate initial public offerings (IPOs) and mergers and acquisitions, and undertake the promotion and development of market activities. Both the CMA and Boursa Kuwait represent the country’s capital markets as members and affiliates of several international bodies and collectives of capital markets authorities, such as the Arab Federation of Capital Markets, the International Organisation of Securities Commission and the International Capital Market Association.

Boursa Kuwait, meanwhile, joined the UN Sustainable Stock Exchanges (SSE) initiative in 2017, with the exchange launching its environmental, social and governance (ESG) reporting guide in September 2021. The guide encourages all listed companies to follow best practices in ESG principles and reporting, and underscores the importance of reporting and transparency. The exchange issued its first standalone “2021 Sustainability Report”, outlining the impact of the exchange’s corporate responsibility strategies to stakeholders. Additionally, the CMA has published a range of guidelines and regulations on ESG topics, with 2022 seeing it authorise green bonds, green sukuk and a variety of other sustainable debt instruments.

Plans & Programmes

The ESG reporting guide dovetails with the goals of Kuwait’s long-term development plan, New Kuwait 2035. The establishment of strong and diverse capital markets is a primary goal of the framework, and successive governments have viewed it as a crucial component of the country’s plans to boost economic diversification away from hydrocarbons dependence. Indeed, its development framework seeks to bolster Kuwait’s role as a financial and commercial regional leader. The capital markets are therefore recognised as a key pillar in the evolution of not only the wider financial sector, but also of the private sector as a whole, since they finance the economy, allocate risk and support sustainable growth.

Additionally, New Kuwait 2035 provides a framework for the CMA’s 2017 Market Development Project (MDP) and reinforces long-term gains by the country’s capital markets. These metrics have been further supported by the exchange’s inclusion in the FTSE Emerging All Cap Index in 2018, the Standard & Poor’s Dow Jones Global Broad Market Index in September 2019 and the MSCI Emerging Markets Index in November 2020.

After the completion of the first and second stages of the MDP in 2017 and 2018, respectively, the third stage was under way as of late 2022. Among other developments, the final stage targets the introduction of a central counterparty (CCP) system to replace KCC’s gross settlement model, the introduction of repurchase regulations and processes, and the issuance of rulings on the division of client accounts into sub-accounts.

In February 2022 Mohammad Al Osaimi, CEO of Boursa Kuwait, told reporters that the CCP was expected to be in place by the end of the year, while derivative products, such as index and single-stock futures, would be introduced a year later. He also said that the exchange was close to being ready to launch a fixed-income market for corporate bonds and sukuk.

Additionally, Kuwait has been moving forwards with fintech development. The CBK launched its fintech regulatory sandbox in November 2018, while in March 2019 it set up a dedicated fintech unit. In February 2022 the authority formalised guidelines and opened the application process for digital banking.

In addition to facilitating the use of fintech, the CMA has embraced new technologies through an ongoing digital upgrade and transformation programme. Boursa Kuwait’s data provision has been a recent focus for these enhancements, with the development of a new web platform and a series of applications. Additionally, in February 2022 Boursa Kuwait and KCC signed an initial agreement with the Abu Dhabi Stock Exchange to facilitate trading procedures between the two bodies and leverage market efficiencies.

Performance

Soon after Kuwait announced the third phase of its MDP in November 2019, the pandemic emerged and resulted in an unprecedented international crisis that saw the shutdown of international borders and daily business operations, slowing the flow of capital and investment.

The government, the CMA and the Central Bank of Kuwait (CBK) rapidly introduced a series of measures to tackle the crisis and mitigate its impact on Kuwaiti businesses and individuals. Boursa Kuwait also introduced a variety of safeguards for its members’ health and well-being, and managed to keep the exchange in operation despite the challenges. Initially, there was a decline in the indices, with the All-Share dropping from 6116.02 on February 19, 2020 to 4443.60 on March 18, 2020 as the pandemic spread. However, the fall proved to be short lived as the index gained momentum over the year, reaching 5549.92 on December 30, 2020. The exchange launched KFH Capital REIT, the first local REIT, on September 1, 2020. This listing aimed to diversify products for issuers and attract more investors to the capital markets. Later that year, Boursa Kuwait successfully self-listed and introduced seven of its listed companies to the MSCI Emerging Markets Index. Indeed, this inclusion led to a major surge in inflows, with some KD961.6m ($3.2bn) traded in a single day on November 30, 2020, with the actual inclusion date on December 1.

The indices returned to pre-pandemic levels by the end of June 2021and continued to grow. The All-Share reached 7043.16 on December 30, 2021, representing a 27% rise over the year. The Premier Market rose 26.2%, the Main Market went up by 29.4% and the BK Main 50 increased by 31.7% in the same period.

The main drivers behind the growth were largely attributed to rising oil prices, which continued into 2021. For example, the spot price of Brent crude oil, a global benchmark, started the year at $50 per barrel and increased to a high of $86 per barrel in late October. This expansion had a significant impact on Kuwait’s oil revenue, which in turn raised expectations for domestic companies across all sectors. Another factor in the recovery was the successful roll-out of the Covid-19 vaccine, which helped the economy reopen.

The All-Share continued to grow and reached a decade-high of 8460.04 on May 5, 2022. The index declined slightly in the subsequent months, but as of October of that year it stood at 7249.17, up 2.9% from January. In addition to the rising demand for oil, the exchange has benefitted from buoyancy in the banking sector, partly due to increasing CBK discount rates in 2022.

Foreign Direct Investment 

Kuwait – and Gulf markets in general – have attracted investor interest and liquidity on a global scale, given their relative stability compared to the mixed performance of more established markets. For instance, as of October 2022 the US NASDAQ, Hong Kong Hang Seng and German DAX had fallen 28.7%, 23% and 21.2%, respectively, since January of that year. As Western and Asian markets reflected uncertainties over global supply chains and oil and gas prices – both outcomes of the pandemic and the subsequent Russian invasion of Ukraine – Kuwait’s market has climbed steadily.

Figures for January to July 2022 showed a net foreign inflow of $3.1bn into the Kuwaiti market, with only one of the previous 12 months – November 2021 – showing a negative net foreign flow. Over the first seven months of 2022 Kuwait accounted for 13.9% of the total traded volume in the GCC countries, on 3.3% of the GCC’s total market capitalisation. Indeed, the total market capitalisation for Boursa Kuwait stood at KD42.6bn ($140.2bn) in September 2022, an increase from KD40.6bn ($133.6bn) in September 2021.

In addition to the 2020 public debut of Boursa Kuwait, utility Shamal Az-Zour Al-Oula Power and Water Company listed on the Premier Market in August 2020, while Land United Real Estate and Jassim Transport & Stevedoring Company listed on the Main Market in August 2021 and October 2021, respectively. Ali Aghanim and Sons Automotive Company joined the Premier Market in June 2022, bringing the number of companies listed on the index to 27, compared to 130 on the Main Market.

According to Al Osaimi, future listings may include a number of currently family-owned businesses, which were reorganising their investments in order to list in 2024, he told international media in February 2022. These would be followed by some government-controlled enterprises, with the standardisation of the listing rules helping streamline future (IPOs).

Bonds & Sukuk

The positive performance for Kuwait in recent months helped to ease the uncertainty in terms of legislative changes in the pipeline, as markets had been concerned in particular by a stalled public debt law. The proposed legislation would allow for the government to issue sovereign bonds and sukuk to finance its activities. It was presented to Parliament in July 2020, after liquidity issues arose in the early months of the pandemic as the economy contracted and oil prices fell. Fresh parliamentary elections were held in September 2022, with the hope a new government might be able to break the deadlock.

These efforts occurred as Kuwaiti companies continued to issue bonds and sukuk throughout the pandemic. The CBK initiated a programme that saw the issuance of bonds and instruments where a buyer purchases a commodity from a seller on credit, and subsequently sells the assets to a third party for cash at a lower rate than the deferred price. This arrangement, known as tawarruq (reverse cost-plus financing), offers individuals and businesses a rapid and flexible form of liquidity.

Tawarruq comes with a three-, six- or 12 month-maturity period and a defined rate of return; 15 such bonds and tawarruq were outstanding at the CBK as of October 2022, at an approximate value of $12.1bn. Rates of return climbed steeply over the year, from 1.6% on a six-month issuance in April 2022 to 3.8% on the same maturity in September 2022.

This increase reflected rising interest rates around the world in 2022, with Kuwait’s central bank following global trends. In response to the pandemic, the CBK lowered its discount rate from 2.75% to a historic low of 1.5% in 2020, where it remained throughout 2021. However, as lower rates globally began to fuel inflation, 2022 saw a series of rate hikes by key institutions such as the US Federal Reserve. Although the Kuwaiti dinar is not pegged to the US dollar the CBK followed suit and raised the discount rate from 2.75% to 3% in September 2022 and then to 3.5% in December 2022.

Meanwhile, on the corporate side bonds and sukuk can be issued either directly by shareholding companies, or via a SPV. Such SPVs tend to be launched in international markets, often using the segregated portfolio company (SPC) format. The Dublin exchange, for example, saw Warba Bank’s SPC, Warba Sukuk, issue a KD150m ($493.6m) Series 2 of its sharia-compliant trust certificates in 2020, while local lender Boubyan Bank also made its first senior, unsecured Tier-1 sukuk issuance – a $500m facility – in the Irish capital in 2021.

In 2020 the total volume of corporate international bond issuance began to rise as companies looked to shore up their positions in face of the pandemic and economic contraction. Kuwait issued $2.6bn in bonds in 2020, compared to $500m in total in 2019. Though issuances peaked at $2.2bn in 2021, they started to drop as the crisis subsided. Sukuk issuances, however, increased steadily from $800m in 2019 to $1.5bn in 2020 and $2.1bn in 2021, indicating demand for these instruments in the GCC region.

One significant achievement in 2021 was Gulf Insurance Group’s first bond issuance – a KD60m ($197.5m) perpetual bond issued in two tranches in November of that year. This event was not only the first such instrument issued by the leading domestic insurer, but also the first Kuwaiti dinar-denominated perpetual bond.

In 2022 corporate issuances continued, although the first Kuwaiti dinar-denominated bond was not offered until September, when National Industries Group completed a KD40m ($131.6m), two-tranche issuance. Gulf Bank and Kuwait Financial Centre (Markaz) acted as joint lead managers of the five-year bonds.

Asset Management

Markaz is also one of Kuwait’s leading asset management companies, along with others including the KAMCO Investment Company – which completed its merger with Global Investment House in December 2019 – the National Investments Company (NIC), Wafra International Investment and National Bank of Kuwait (NBK) Capital.

In terms of assets under management (AUM), NIC reported KD1.1bn ($3.6bn) for the first half of 2022, while KAMCO reported KD4.24bn ($14bn) in the same period. KAMCO also ranked sixth in Forbes Middle East’s top-30 asset management companies in 2022, while Wafra came in 10th, with $10bn in AUM. Markaz, meanwhile, reported KD1.2bn ($4bn) for the first six months of 2022, while NBK Capital posted KD2.4bn ($7.9bn) AUM for March 31, 2022.

Even as these firms are major players, the Kuwait Investment Authority (KIA), the state’s $700bn sovereign wealth fund is another major actor in the space. It has been increasingly active in global capital markets, focusing in particular on new IPOs. The KIA is responsible for the management of Kuwait’s General Reserve Fund and Future Generations Fund, with the former accessed during the pandemic to fund budget gaps, while the latter cannot currently be accessed by the government unless sanctioned by law. This may change, however, under the potential provisions of the new public debt law under deliberation in Parliament.

Outlook

Kuwait’s capital markets are expected to witness further expansion in 2023 and beyond on the back of ongoing regulatory improvements, a growing economy, strong oil prices that continue to boost government revenue and an expected infusion of infrastructure spending. Indeed, the nation is well-positioned to continue attracting international investment in the coming years despite the high levels of uncertainty over the future path of the epidemic, and the ongoing conflict between Russia and Ukraine.

The period ahead will also see the market continue to deepen and widen, with a corporate bond and sukuk segment, and derivatives offerings all on the immediate horizon. Cross-border collaboration and further listings – particularly in under-represented sectors such as media – will also help broaden Boursa Kuwait’s base.

However, political uncertainty remains following the September 2022 parliamentary elections. The transition to a new Cabinet could create obstacles to the approval of legislation with the legislature, potentially delay the approval of economic reforms such as the public debt law and impede the development of fixed income. Nonetheless, with Boursa Kuwait showing robust growth and with the country’s leaders and regulating bodies committed to improving and developing their offerings, the country’s dynamic capital markets are anticipated to expand rapidly in the coming years.