Leading by Example
The Kuwait Stock Exchange (KSE) dates back to April 1977, receiving its current name in 1983. It has come a long way since the passage of the first law aimed at regulation, namely Commercial Law No. 15 of 1960. That had determined the issuance of and subscription to shares, and was followed by the promulgation of the first law directly concerning stock trading exactly one decade later. An official decree in 1983 established today’s modern regulated KSE. Catered to by 14 brokerages, the bourse is open Sunday to Thursday from 9:00 am to 12:30pm
IMF Calls for Bold Steps
While our task in this chapter is not to consider the economy per se, a brief sojourn is useful if only to contextualize the urgency of fostering capital market growth within the nation’s broader objectives. In oil’s halcyon days prior to 2014, Kuwait had derived around 95% of its income from the black stuff (USD97 billion in the 2013-2014 fiscal year). The figure in the fiscal year ending March 31, 2016 saw a more than halved print of USD40 billion, and is likely to read at USD35 billion for the current one. Of note, most of Kuwait’s listed oil and gas stocks are not directly involved in crude trading, instead offering logistical and complementary service.
In November 2016, in the wake of Kuwait’s first budget shortfall of USD15 billion in the previous fiscal year, after 16 years of surpluses, the IMF urged the government to bite the bullet and enact fresh energy subsidy reforms, which the government had earlier anticipated occurring by 2020. Indeed, diesel and kerosene prices had been liberalized, sparking the political backlash that led to early general elections on November 26, 2016, where opposition candidates won 24 of 50 seats in the National Assembly. The IMF at the same time acknowledged that the country still benefitted from its ‘AA’ credit rating, afforded, among other factors, by its a break even oil price of roughly USD52/bbl, the lowest in the GCC. It estimates that Kuwait requires USD116 billion to finance its deficit over the next six years.
Reform to Spur Participation
In actual fact, while energy has been the headline-grabber, work has long been underway to bolster Kuwait’s economy through alternative revenue streams, not least of which are the capital markets themselves. In April 2014 vital Capital Markets Authority (CMA) regulations came into force to further incentivize listing in pursuit of appetizing liquidity. We may particularly note those provisions reducing shareholder equity requirements (from 115% to 110% of the company’s weighted average paid up capital for the preceding two financial years) for the listing of a Kuwaiti closed joint stock company on the main market. Net profit stipulations, too, were reduced from 7.5% to 5% of a company’s paid up capital for two years preceding application. Significantly, too, under the new regulations, a company may list before it has secured approval of a minimum of 200 shareholders, so long as it does so within two months, and only then undertake an IPO. The same applies to the parallel market, where now, 100 shareholders are required up from 50 previously. And finally, appealing to those firms keen on a wider international footprint, the percentage of shares that a KSE-listed company may list on a foreign stock exchange is increased from 30% to 40% of the company’s capital.
A Momentous Event
In April 2016 a major turning point was reached through demutualization, as bourse operations entered the private sector with the takeover by Boursa Kuwait Securities Company (BKSC), itself established in April 2014 by the CMA. Boursa Kuwait had been set up precisely to assume the ownership of a privatized KSE, develop Kuwait’s capital markets into a regionally competitive exchange with global trading standards, and ultimately stage the KSE’s IPO when market conditions prove favorable.
Vice-Chairman and CEO of Boursa Kuwait Company, Khaled Abdulrazzaq Al Khaled explained in a TBY interview that, “We are restructuring the infrastructure of the stock exchange itself in three phases. We have successfully completed phase one, which primarily involved the setting up of Boursa Kuwait. Phase two entails the formulation and implementation of our initiatives and strategy roadmap, and is almost complete. Finally, phase three includes the assumption of full operations of the KSE and preparations for a company IPO in due course.” He cited the IPO of food and FMCG producer Mezzan Holding as a benchmark of listings success. The latter was the first IPO since 2009, as companies had shunned the move since the global credit crunch, in the wake of which the KSE had hemorrhaged 56%. Meanwhile, 2017 seems set “to be our breakthrough year [with the introduction of] short selling [and] derivatives and options” on the horizon. The terms of the IPO foresee 50% of the exchange’s shares being offered to Kuwaiti citizens, with 6-24% to be split among government entities and 26-44% to be allocated to seasoned international operators.
The KUWAIT 15 (KSX 15) is the bourse’s flagship index, comprising the 15 companies ranked highest by liquidity and size. In 2016 it had troughed at 767.74 on January 21, 2016, but amid 12 months of pronounced fluctuation, had recovered towards its late December 2015 level of 907.3, printing at 892.99 as of December 19, 2016, by which date it had seen a 1-year return of -1.43%. Meanwhile, the benchmark KWSEIDX index as of December 18 had seen a better 52-week return of 0.74%, closing at 5,657.13. The 52-233k range had been at 4,911.54-5,679.02. Prevailing uncertainty and economic headwinds had meant that the earnings of the bourse’s 177 listed Kuwaiti companies (197 companies listed in total) had shed 6% YoY in 9M2016. Non-bank financial services, such as investment companies, were behind most of the decline in profits, as sector earnings plummeted 69% YoY, deflated by poor sentiment as other GCC equities had fared poorly in 2016. This, clearly dented commission income. And meanwhile, for the month of November 2016, the top-five gainers were Yiaco Medical Co. (51.9%), Osoul Investment Co. (117.17%), Al Imtiaz Investment Group Co. (45.21%), GFH Financial Group (45.1%), and Credit Rating and Collection Co. (43.1%). The top-five losers meanwhile were Safat Global Holding (-43.3%), Osos Holding Group Company (-24.9%), IFA Hotels and Resorts Co. (-16.67%), Amar Finance And Leasing Co. (-15.63%), and Zima Holding Co. (-14.74 %).
Once conditions merit the move, Kuwait’s capital markets will witness their own IPO. And in the interim, sentiment will be shaped by regional events and those further afield, but also by the extent to which the government commits to energy sector reform, which to date has proven less than popular.
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