While in the last few years many states in the region have debated moves to establish local secondary and junior markets, Qatar has taken several steps towards making these a reality. The state has begun issuing local currency treasury bills (T-bills) with an eye to developing a domestic market for fixed-income products. Likewise, the Qatar Exchange (QE) has embarked on a new plan to establish a junior market for small and medium-sized enterprises (SMEs). As part of these efforts to deepen and widen the capital market, the QE is also now moving towards the introduction of new products, such as exchange-traded funds (ETFs) and real estate investment trusts (REITs). These three moves, made under the auspices of the High Level Financial Market Development Committee, are key elements in the long-term development plan for the exchange, as well as for the nation, as Qatar seeks to establish itself as a regional and international financial centre.
BILLS & BONDS: Until late 2011, the QE was a platform for equities only. Issuance and subsequent trading of Qatari corporate or government bonds took place elsewhere, often London or Luxembourg. But this changed in December, when the Qatar Central Bank (QCB) approved the listing of T-bills on the QE. Initially 10 of these short-term bonds, which have maturities that range from three to nine moths, were listed on the exchange, with plans to list more each month. Indeed, as of September 2012, there were 18 such T-bills listed on the QE.
The history of T-bills in Qatar is actually quite limited, with the QCB having initially started selling the short-term debt in May 2011 as a replacement for the issuance of certificates of deposits, which were discontinued. Sales of the government’s T-bills have been significant, with the governor of the QCB, Sheikh Abdullah bin Saud Al Thani, saying in October 2011 that the central bank’s sales between May and September 2011 averaged about QR2bn ($549.2m) each month. Moreover, monthly issuances continued to rise into the following year – the central bank governor revealed in April 2012 that sales had increased to QR4bn ($1.1bn) per month, adding that the QCB intended to keep sales at that volume.
It is clear that the primary use of these T-bills has been to drain excess liquidity from the banking sector. Indeed, Qatar’s lenders buy most of these debt instruments, with the country’s banks holding T-bills valued at QR8bn ($2.2bn) as of September 2011. However, their issuance will also help establish the short end of the yield curve as Qatar strives to become the first GCC country to develop a local currency debt market. Moreover, taking the additional step of allowing bond trading on the exchange, rather than limiting activity to traditional over-the-counter deals, will improve pricing transparency.
LOOKING AHEAD: Authorities in Qatar have taken a fairly cautious step in introducing T-bills to the QE, but this programme could be extended beyond short-term debt instruments. Indeed, in December 2011 the governor of the QCB publicly stated that longer-term government bonds and sukuk (Islamic bonds) would be added at a later stage. Introducing a range of short-, medium- and long-term fixed-income securities would help establish a full yield curve for government debt, which in turn would make it easier to price corporate bonds in the local currency. Qatari businesses have long had success in selling debt on international markets, but authorities are now working to encourage these firms, as well as regional businesses, to consider the QE instead.
If Qatar is successful in building a yield curve and establishing a local currency debt market, then it will be only the third country in region to do so, joining Egypt and Turkey. Much depends on the volume of issuances, with the QE and the Qatari authorities likely to try to encourage further bond sales. This development could also cause a shift away from current practice among many Qatari companies of raising funds from banks, rather than capital markets.
SME LISTINGS: In addition to initiatives to develop the local debt market, on January 25, 2012, the QE announced a junior market for small caps. Known as the QE Venture Market (QEVM), this is to be a dedicated exchange or platform for trading SMEs, and will provide a space for smaller companies with lower capital requirements and shorter track records than those listed on the main market. The QEVM will give this group an alternative source of funding to banks, while also bringing them into the QE’s regulatory framework. This introduction of the QEVM has been welcomed by market participants. “The positive steps that are being taken by QE to promote SMEs for listing will help in addressing the major challenge of getting equity capital to SMEs and provide impetus to the overall growth of the equities capital market in Qatar,” Sanjay Bhatia, the managing director at Alpen Capital, told OBG.
As the SMEs grow, they can transfer to the main exchange. Both foreign and domestic companies are eligible to list on the QEVM, with firms from the GCC region being a particular target. The move also comes as part of a wider strategy of SME development in Qatar. This forms a portion of the National Vision 2030, which sees these companies as vital foundations for economic diversification. Thus the launch of the QEVM has received substantial backing from entities such as the Qatar Development Bank (QDB), Qatar Enterprise and Silatech. These three have provided technical and financial support.
REQUIREMENTS: Listing requirements for the QEVM are less stringent than those for the QE. The minimum subscribed capital required is QR5m ($1.37m), rather than QR40m ($11m), the number of shareholders is 20 as opposed to 100 (30 if a family company), and there are generally lower listing fees – a flat rate of QR25,000 ($6865) per company, rather than QR0.0003 ($0.00008238) per share on the main board. SMEs also only need a track record of one year, as opposed to three, and can list with a minimum free float of just 10%, rather than 20%.
There are, of course, a number of challenges in getting SMEs to list. Many are family companies that may not be comfortable with ownership passing outside. Others may be wary of the scrutiny and transparency that listing entails. At the same time, the economy is booming, with banks also seeking to extend their loan books with businesses – and thus competing with capital markets as a source of financing. Indeed, efforts through the banking sector to boost small caps – such as the QDB’s Al Dhameen programme, which guarantees up to 85% of loans made by private banks to SMEs – also add to the available funding options. The QEVM therefore has to compete for attention in securing listings.
The signs are that it is already doing so. The QE has been holding a series of popular road shows, highlighting the case for listing to businesses. With many family SMEs now in their second generation, the disadvantages of family ownership when it comes to entering or leaving the business are clear to many. This new generation may then prefer to structure their companies on a more flexible, joint stock basis.
In early 2012, QE officials expected around 10 companies to make an initial appearance in the market, as they waited for a critical mass to emerge before formally beginning trading. The infrastructure was already in place, however, while the regulations were with the Qatar Financial Markets Regulatory Authority, waiting for approval.
ETFS AWAIT: The third new initiative being undertaken is a move towards launching ETFs on the QE. Once investable benchmark indices are established, the QE should be set to launch ETFs before the end of 2012, the then-CEO Andre Went of the QE told the press in March 2012. With these moves made, the hope is that the QE’s role in Qatar will see substantial growth in the years ahead – with the exchange establishing itself not only as a premier source of funding for Qatari companies, but also for enterprises throughout the GCC region and beyond.
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