MENA securities market on the rise

• Enhanced market infrastructure in The Gulf Cooperation Council (GCC) member states is attracting foreign investors
• Regional exchanges are increasing cooperation and improving standards
• A greater emphasis on risk mitigation is making the MENA region more attractive
• The development of human capital is helping to support regional growth

The Middle East and North Africa (MENA) remains a highly dynamic region, driving investment opportunities both regionally and across the globe. Like many regions, the MENA region is on a mission to develop its capital markets to ensure ease of access to the opportunities available. The securities sector in the MENA region has experienced significant development over recent years, with a strengthening of local financial institutions, a strong presence of regional asset managers and increasing interest from foreign investors. “The region is experiencing much more interest from investors, asset managers, sovereign wealth funds and public institutions from outside the region, especially from Asia,” says Rocio Echague, Head of MENA exc. Saudi Arabia, Securities Services, HSBC.

Foreign Direct Investment (FDI) into Saudi Arabia and the UAE hit record highs with $40 billion in 2022, and increase of 58% over the previous year. As global corporates and funds increasingly set up roots in the region, with talent continuing to move in, 2023 is anticipated to be another record year for FDI in the Middle East.¹

Key MENA projects driving FDI and UK-to-Middle East investment in 2023 will include infrastructure and engineering, tourism and hospitality, and clean/renewable energy; most notably, the megaprojects in Saudi Arabia. Saudi Arabia’s top seven infrastructure projects are estimated to cost $690 billion to construct. These schemes are NEOM, ROSHN, Diriyah Gate, Jeddah Central, Red Sea Project, AlUla, and Qiddiya.²

On the Initial Public Offering (IPOs) front, MENA witnessed a record year in 2022 with 51 listings and $22Bn raised³; Q123 saw 10 listings and $3.4 Bn raised⁴. The GCC will continue to attract IPOs this year, despite the challenges facing the global economy. It is estimated that between 27 to 39 companies could float their shares in the region this year.

The Gulf Cooperation Council (GCC) region has undergone significant capital market reforms in recent years, including development of local market infrastructure and implementing measures to attract foreign investors. All GCC members, with the exception of Bahrain and Oman, are now listed in Emerging Market (EM) indices. This has had a significant impact on investment activity in the region.

“We are seeing a virtuous circle of more foreign investment coming to the region and market infrastructure enhancing operating models to attract more foreign investments,” says Echague.

HSBC has a presence in all GCC member countries and has witnessed many of these market changes first hand says Sebastian Danloy, Managing Director from Securities Services, HSBC. The recent introduction of a Central Counterparty (CCP) in Saudi Arabia has facilitated the launch of new asset classes such as derivatives and will help strengthen market infrastructure and reduce risk.⁵ Saudi Arabia had introduced a T+2 settlement cycle and Qatar has plans to do so shortly, which will increase the efficiency of transactions and bring the market in line with international best practices.⁶

In The United Arab Emirates (UAE), the country’s Securities and Commodities Authority (SCA) have been on a drive to raise the standard of local exchanges such as the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). In 2023, the UAE ranked as the top emerging market in the MENA region, and the third globally, according to the Kearney Foreign Direct Investment (FDI) Confidence Index.⁷

In Oman, there are concerted efforts to implement market reforms that will support raising the country’s classification to emerging market status.⁸ The Muscat Stock Exchange (MSX) has been converted into a closed joint stock company under the supervision of the Oman Investment Authority (OIA) in a move to increase transparency and improve governance in the capital market.⁹ “The new Settlement and Clearing regulations will see partial settlement and late confirmations being introduced (on T+4), and compulsory buy-in will be enforced by T+4 in case of securities deficit, while custodians will also become clearing members,” says Danloy.

Bahrain has strengthened the links between its clearing settlement and central securities depository systems, has plans to introduce digital account opening and e-voting at company AGMs, which are a legal requirement in the country; ensuring that shareholders have equal rights and protections whether attending virtually or in person¹⁰. “There has been a big push locally to move the exchanges in the region to a higher standard and to upgrade the market to a developed market,” explains Danloy.

Most MENA markets have implemented Delivery Versus Payment (DVP) models, in line with international standards, to avoid settlement risks and enhance capital market infrastructure. The Post Trade Transformation Program (PTTP) in Saudi Arabia introduced greater efficiencies, helped investor and market participants to manage risks and opened market opportunities that previously didn’t exist. The introduction of the CCP was also key to reduce risk in the market. Countries like Qatar, Kuwait and UAE (ADX) are also looking to introduce CCPs that will help reduce systemic risk in the markets, as well as being able to introduce products. Saudi Arabia has also introduced multiple settlement cycles throughout the day to increase liquidity. HSBC recently completed the first securities lending transaction in Saudi Arabia.¹¹ The bank collaborated closely with the market authorities to arrive at a standard SBL framework which is operationally efficient and worked closely with the lender and borrower to complete the transaction. “It’s really important to create a sustainable model to support the liquidity that exists in the market,” says Danloy.

In the wider MENA region, Egypt has established the Egyptian Central Securities Depository (ECSD) to help manage the registration deposit and settlement procedures for government debt and to facilitate access to the local market through International Central Security Depositories.

The GCC region is also starting to see more dual listings between exchanges in the region, with Americana Restaurants, one of the largest franchise operators in the Middle East, recently being listed on both the ADX and Saudi Exchange.¹² “More and more exchanges in the region are establishing memorandums of understanding and cooperation agreements to facilitate multiple listings of the same issue across exchanges,” says Echague.

The Gulf region offers a unique combination of economic dynamism, high quality of life and an attractive location. Employers will need to keep up with the pace of change by adapting their recruitment strategies and heavily investing in training and the development of local talent. A balance must be struck between the need for local job creation and the ability of businesses to attract the right talent and foreign investment needed to grow and stay globally competitive.¹³

Many Gulf countries have implemented visa and residency reforms to attract skilled expatriate workers. Governments have also invested heavily in education and training to develop a local workforce with the skills needed to support the region's growth. This includes initiatives such as the UAE's National Program for Advanced Skills and the Saudi Arabian Human Resources Development Fund.

From a demographics perspective, GCC nations are young, affluent and witnessing demographic shifts – including smaller households and rising female labour participation rates. Governments have also sought to promote entrepreneurship and innovation to create job opportunities and develop a culture of innovation in the region. This includes initiatives such as the Dubai Future Accelerators program and the Qatar Science and Technology Park.

HSBC is actively supporting the development of local markets and introducing new investors to the region. The bank was the first international General Clearing Member (GCM) to join the DFM market, is driving the development of Securities Lending & Borrowing (SLB) in markets such as Saudi Arabia, Qatar and UAE, and has helped develop thought leadership in the region.

“When we speak to clients, the region has clearly become an important destination for investments for international clients. On the other hand, outbound investments from the region represent one of the most significant pools of capital available and so we at HSBC are in a privileged position to support both inbound and outbound cross-border investments from our clients,” says Danloy.

“We have a long-standing relationship in this region, but we also see more and more competitors entering the market. The lasting relationships we have established in the Middle East put us in a strong position to make this region a success both for international and domestic players.

“We continue to remain fully committed to the further development of the regional markets and we are excited by the pace of reforms the region is witnessing and the plethora of opportunities that lie ahead,” he concludes.

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