TOGY talks to
From vision to execution in KuwaitJune 21, 2018
Manaf Abdulaziz Alhajeri, CEO of Kuwait Financial Centre “Markaz”, talks to TOGY about the financial landscape of the region, what needs to be done in order to attract foreign investment and how the company has shaped the country’s financial industry. Kuwait Financial Centre “Markaz” specialises in fee management and investment banking, including work on acquisitions and market research.
On developing the market: “Kuwait is a frontier market that needs a lot of developmental thinking. This cannot always be achieved by engaging only international consultants; sometimes one needs to listen to key local players.”
On innovation: “Regulation has to be supportive. Sometimes it gets more challenging as regulations, although very important, are not always the best friend of innovation. Therefore, regulators need to be aware of how their policies are affecting the sector’s ability to innovate by being in a constant constructive dialogue with the sector’s players.”
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What economic risks are involved in doing business in the region?
The GCC region is mainly dominated by two factors, i.e., oil prices and geopolitical stability. We identified four scenarios that play out in terms of the interaction of low and high oil price and stable and unstable geopolitical situation. The worst scenario is when there is an unstable geopolitical situation and low oil prices. However, when there is stability and high oil prices, complacency is likely to prevail.
Complacency can be a malady of the region. When high surpluses reign for long, the incentive to introduce tough reform measures and engage in expansion, modernisation and innovation is relatively low. In this situation, the public sector can accommodate most of the employment. Therefore, the incentive to have an active and dynamic private sector is not there.
Currently, a high-risk environment exists, geopolitically speaking. Oil prices went up to around USD 70 per barrel, but it does not appear to be based on strong market fundamentals. The higher oil price is in direct response to OPEC cutting supplies in co-ordination with Russia. In other words, the comfort that comes with regular, stable prices does not exist.
The sentiments are slightly tense when it comes to investing now. The disposition of both investors and governments does not lean towards massive spending; they tend to be very selective. The region needs to align elements to be positioned towards the bigger picture to be able to formulate clear policies. Once governments overcome their most stressing national and regional challenges, there will be less volatility in the system and more effective policy statements by policy makers.
VAT, for instance, is something that goes hand in hand with the political situation. The reluctance to introduce the VAT measure has to do with the geopolitical instability that is prevalent now.
Is the government’s foreign investment target achievable?
KDIPA [Kuwait Direct Investment Promotion Authority] is an organisation that has fulfilled a reasonable part of what it has promised. However, it is a facilitator, meaning that it does not create investment opportunities. It showcases opportunities to the international community, and it is apparent that what it has been introducing to the market is quite healthy.
With respect to Kuwait, there is a need to promote awareness among stakeholders with respect to the current structure of the overall resources matrix. The financial resources exist. The country continues to enjoy a remarkably solvent fiscal position, which is a big plus for investors looking to invest in the country. The vision is there too. And it appears, to a large extent, as a valid one. Kuwait is moving in an interesting direction.
However, the challenge is in the execution. More stakeholders need to realise the importance of modernising and innovating, and expanding the economy away from the hydrocarbons sector. On an optimistic note, more and more entities are likely to join the KDIPA bandwagon.
What does Kuwait need to do in order to meet its foreign investment goals?
There needs to be more commitment towards the stated visions. For more than 50 years, Kuwait has put forward the intent of diversifying away from the oil economy. However, this has not come to fruition so far.
Kuwait’s public sector needs to commit to its statements and be held accountable for steps that are publically announced. The country has to transition from the vision towards execution. Kuwaiti public institutions – whether in the oil sector or other sectors – need to be held accountable in order to execute the economic vision.
In terms of the private sector, accountability exists to a large degree. In a country such as Kuwait, where there is democracy and freedom of speech, accountability can be fostered in the public sector as well. It is possible that Kuwait’s democracy and the parliament have not yet fully aligned with stated long-term objectives. Holding public officials accountable for realising Kuwait’s long-term vision has still not come to pass.
VAT is another method of increasing revenues to the state treasury. However, it is not easy to implement because – like everywhere else in the world – the parliament may sometimes have a greater incentive to play the populist card rather than pursue long-term goals. Tinkering with what is convenience in the short term may be much easier than adhering patiently and persistently to the long term goals.
As long as Kuwait does not achieve its long-term objectives, it will not be in a position to fully optimise the potential that exists. Fortunately, democracy is a strategic game that one wants to preserve and let thrive.
Do you see the strategic reformation of Kuwait’s stock exchange as a necessary step towards achieving the nation’s long-term goals?
There is little doubt on that. The statements of both the CMA [Capital Markets Authority] and Boursa Kuwait are valid in that regard. Kuwait needs to see more money coming from the international community. There is the argument that it can be hot money, but keeping the bigger picture in mind, a combination of stock market inflows and FDI brought in by KDIPA – which tends to be more patient – is an interesting combination.
What is interesting about Kuwait is that there is a lot of talk of increasing liquidity in the market. However, not all of the stakeholders would notice that the biggest market maker was actually the state itself, and there is no embarrassment in conceding that. This is a resource that Kuwait should put into use.
At times, Kuwaiti stakeholders tend to assign more importance to the international community than the local one. That importance should be shifted to the local commitment because if there is a lack of local money, it would prove impossible to attract foreign money.
Markaz manages part of the National Real Estate portfolio, owned by the Kuwait Investment Authority [KIA], with a maximum value of KWD 250 million [USD 882.6 million]. The fact that Markaz is the only company in Kuwait that is entrusted by a sovereign wealth fund to manage its real estate as well as other equity investments in Kuwait and the MENA region reaffirms the vital role of Markaz as a market maker.
However, the KIA and players such as Markaz need to be provided with more commitment and support to be the dominant players in the stock market. The system has many imperfections, but it also has significant strengths. A realistic strategy is to depend on the strengths of the system and build upon it.
Development of the Kuwaiti market is very important. Kuwait is a frontier market that needs a lot of developmental thinking. This cannot always be achieved by engaging only international consultants; sometimes one needs to listen to key local players.
What is your firm’s exposure to the oil and gas industry?
Markaz Energy Fund is one of our company’s innovations. It was created in 2006 as a private equity fund, founded on the premise that Kuwait was going to privatise its national oil companies. Markaz believed that the fundamental case was compelling because oil and gas assets had been exclusively managed by the public sector for too long, and there was a case to improve efficiency and involve the private sector.
We would definitely see better deal flows if the private sector were to get more involved. Markaz wishes to see a higher number of names from the private sector involved in the oil and gas industry, especially from financial institutions rather than the consulting sector.
At the time of establishing the fund, Markaz saw that the deal flow was very weak, and thus had to create its own company. It is a happy development that the equipment leasing company created after the fund was established is up and running. It is very active in leasing and sell-backs for contracting in the oil and gas sector.
How receptive is the market to your new financial mechanisms and ideas?
It hangs in the balance as Kuwait is still not a developed market. It is still not even considered as an emerging market. Kuwait is a frontier market, meaning that the market has many limitations. The equity market is dominated by a lot of speculation. It is not easy to teach the market to invest in an institutionalised manner.
That being said, Markaz has continuously experimented with the market and pioneered many investment channels since its establishment in 1974. Markaz established the first domestic mutual fund in Kuwait (Mumtaz) and the first money market fund (Idikhar) in 1999. If you look at the options trading platform, which Markaz introduced through Forsa Financial Fund, we made a system that would create call options, the first in the Middle East. It was publicly traded on the stock market and very popular, even among retail investments.
The real estate investment trust [REIT] is another success story. Markaz has REITs in both its US and Kuwaiti products. In fact, Markaz manages one of the best-performing and largest real estate funds in Kuwait, Markaz Real Estate Fund [MREF]. The fund distributes income on a monthly basis, which could be a difficult ask for any other company. Had Markaz not had strong internal systems and internal controls, it would not have been able to realise this.
Following the subprime crisis, there was a lot of renewed interest with stable instruments that distributed steady income. MREF increased in size three-fold after the subprime crisis from around KWD 55 million [USD 181 million] to more than KWD 120 million [USD 396 million]. It is a fund still distributed by Gulf Bank of Kuwait, as part of an innovative partnership. Even such partnerships are a novelty, since rarely have there been successful partnerships between two independent institutions, not only in Kuwait, but across the wider region too.
Markaz is also the first in Kuwait to issue sukuk and to introduce the ETF [exchange traded fund] product. Innovation is crucial in our field to elevate our markets from the frontier market status. However, regulation has to be supportive. Sometimes it gets more challenging as regulations, although very important, are not always the best friend of innovation. Therefore, regulators need to be aware of how their policies are affecting the sector’s ability to innovate by being in a constant constructive dialogue with the sector’s players.
What are your company’s short-term goals?
Markaz is known to be very active, emergent and acquisitive with clients’ interest as the focal point. Many companies and clients come to Markaz for structural solutions. Due to geopolitical tensions, some clients want to widen their geographic investment choices, and Markaz is improving its capabilities in that regard. It is a credible strategy to focus on balanced asset allocations.
Markaz sees itself among the very few regional leaders who manage opportunities coming from the market, in addition to being very much at ease with developed markets in terms of equity and real estate.
Markaz is noticing a lot of interest in infrastructure projects too. Thus, we have many announced projects; however, the execution of PPPs [public-private partnerships] tends to be slow. Ultimately, there is a need to move ahead with the promises made.
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