Interview: Faisal Sarkhou
What can the Capital Markets Authority (CMA) do to encourage market depth and sophistication?
FAISAL SARKHOU: Kuwait falls into what is known as a frontier market. International investors prefer looking at investing in emerging markets, which are considered a level above frontier markets in terms of depth, breadth, transparency, corporate governance, market capitalisation and liquidity levels. However, to achieve that status, the economy requires, among other things, strong regulation. Kuwait took the first steps in this direction by introducing the CMA. The Kuwait Stock Exchange (KSE) is one of the biggest exchanges in the region, and CMA oversight is meant to enhance regulation and to increase transparency and corporate governance within the exchange. Since its inception two years ago, the CMA has expanded both its capacity and interaction with the market. There have been some delays, but each month it grows into a more enhanced regulator. Through effective regulation, the CMA adds value to the market by appropriately regulating companies, introducing securities and increasing investor confidence. Its role will be very important moving forward.
To what extent has the new trading system X-Stream had its desired effect on the market?
SARKHOU: Like the CMA, X-Stream is still in its infancy. It has not yet been fully accepted by the market due to usability issues. Although the system does allow for more investor participation, which is a huge benefit, a number of enhancements and adjustments are needed. Brokerage houses need to align themselves with the X-Stream system and work with the managing authorities. Eventually, the new mechanism will add value to the market as a whole and help the CMA to prevent the kinds of market manipulations seen in the past.
How are the regulatory environment and the financial vehicles offered helping develop the market?
SARKHOU: The CMA combined with the capital market mechanisms available in Kuwait today will help investors and companies look at developing products.
Once people are versed with the system and the CMA, they will be more comfortable in looking to establish new products and innovations. The options market has existed for eight years, and the framework is already in place for the new products. I think players in the market are looking forward to understanding and utilising the new system in order to launch new products.
How can entities be encouraged to participate in the secondary and bond markets more actively?
SARKHOU: The challenge the market faces is that it lacks both depth and breadth. We need more issuers coming out and creating the environment for a secondary platform, but we also need more primary issues to support the secondary market. In any asset allocation strategy, these must be depth to have a selection of instruments. For funds to be created, investors need to have options, and options cannot be created with only six issues in four years. Thus, the government also needs to think about having its own issuances. Many governments, including wealthy ones, borrow long term. However, the Kuwaiti government only borrows short term. Without a yield curve or a benchmark rate, it is difficult to create a secondary market. Additionally, the role the government plays in creating a savings culture could be enhanced. Ultimately, investors looking for options can be given the opportunity to buy long-term instruments that yield a reasonable return.
What is behind the motivation to privatise the stock exchange, and what impact is this likely to have?
SARKHOU: Privatisations are done out of the need for efficiency and for the generation of money. In the case of the KSE, there is no need for money, but a great need for improved efficiency. The government’s strategy for reform is by fostering more competition, speeding up the development of the capital markets and allowing more instruments to be introduced. The goal is for Kuwait to be competitive with other regional exchanges.
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