Greater liquidity fails to boost Muscat securities market
Various government measures aimed at propping up Oman’s faltering bourse have failed to give any significant boost to performance and the government has now said that there will be no further intervention. Three major steps have been taken in the past few months to boost the Muscat Securities Market (MSM) but have had little impact on the market, which fell 19.6 percent in 2000 and closed at 200.6 points on January 15, compared to 201.98 at the end of 2000.
The Capital Market Authority (CMA) has now confirmed that it can help no more, with CMA chief Yahya al-Jabri saying on January 15, that the government’s recent intervention “is not repeatable...this is a once-only measure and investors should learn from this.”
On November 12 last year the government announced that it would buy up 50 percent of the trust accounts of small investors, up to a total of OR14 million ($36.4 million). Brokerage companies will carry 25 percent of the total while the remaining 25 percent is to be borne by the bank that extended the facility to the broker. This move was accompanied by efforts to encourage consolidation among brokerage firms.
The government is now offering merged firms a soft loan of up to 50 percent of its capital for a period of five years carrying a nominal interest rate of 4 percent. Merged entities will also be entitled to exemption from profit taxes throughout the period and will be offered additional capital of up to OR50 million ($130 million) from an investment fund recently established by the State General Reserve Fund. Those firms that resist consolidation will not be eligible to such benefits and will be forced to raise their capital by OR5 million ($13 million).
Some brokers are optimistic that the bourse will turn around and just needs some time. “Investors are waiting for company results, which are likely to be upbeat given the higher oil prices last year,” one investment officer told MEES. “This new fund is bringing OR50 million. Coupled with the OR38 million ($99 million) in trust accounts and some OR15-20 million ($39-52 million) of soft loans, this has pumped over OR100 million ($260 million) into the capital market in just a few months. This has to filter through eventually.”
The same source also believes that the planned introduction of a new index at the MSM is likely to encourage more positive market sentiment. Consolidation may also move forward. Al-Shalman Securities is reported to be in discussions with al-Mawarid Securities and Gulf Investment Services is talking to Financial Investment. “The process is ongoing,” the same source said. “But it will happen and will also strengthen the banks because it will reduce their [brokerage firms’] leverage with them.”
Other analysts are less upbeat and believe the intervention itself was an instance of missing the fundamental point. “Basically it’s a bailout package, but it’s misplaced because it assumes that the lack of liquidity is causing the problem, which is not the case,” one analyst said. The problem is the poor choice of investments in the market. The quality of the companies listed, especially industrial ones, is not good. We really do not have any growth sector stocks, like telecom, IT or biotech, and it’s unlikely we’ll get any even in the near future. This intervention just brings money in and will be used by existing investors to dump their stocks. People know that after this money, there’ll be no more coming in. This has been borne out by what we see in the market over two months since the package was announced.”
Some brokers also expect poor earnings for 2000 and say that buoyant oil prices do not guarantee a boost to the stock market, since the government took a conscious decision last year to boost its reserves following the shock of 1998 in an effort to create a buffer against lean years in the future. As a result, higher prices have failed to feed into the economy as a whole.
Even increased government spending is not a sure-fire means of boosting domestic economic activity, as one Muscat-based analyst explained to MEES. “There is a lot of noise being made about how the government has issued some OR400 million ($1.04 billion) worth of tenders, but most of the projects are infrastructure ones in things like utilities or privatizations. This is highly specialized work and much of the associated income finds its way into the pockets of foreign specialized companies and not into the domestic economy. There is no listed company here that has the means to tackle these projects on their own. Local firms are marginal partners so the value addition in the domestic economy is very little.”
The government’s effort to buy up the trust accounts has also been criticized as essentially sending the wrong message. “You go take a punt in the market, if you win you laugh all the way to the bank. If you lose, big brother’s there to bail you out. You are creating moral hazard and doing little to discourage people from borrowing beyond their means.” It has also been described as unfair. “Why should the banker be held responsible for something that is an internal affair between the client and the broking company?”
Many investors and analysts believe that long-term prospects for the MSM, as in neighboring GCC markets, will depend on the strength of the underlying structure of the economy and the level of transparency. Recent trading volume patterns have done little to allay concerns. Despite a relatively flat year, the MSM had a total trading volume of OR450 million ($1,165.5 million) by the end of the year, although at early December it stood at around the OR210 million ($545.3 million) mark. “Some OR240 million of trading came in the last four or five days of the year when the stock exchange was closed,” one broker confirmed. “We don’t know where this figure has come from. It’s obviously a third market deal, but the normal procedure is not to allow it on a closed working day.” Already investors are easily discouraged.
“Many locals invest abroad, which is why even though the currencies are pegged to the dollar, the rate of interest on local currency is so high. You can borrow in dollars at 4-5 percent and invest here at 8 percent. The government keeps its opportunity to arbitrage because they want the locals to keep their money in rials not in dollars and they’re using monetary rather than economic policy to do it. You need to give investors more opportunities to invest, better labor policies and better legal policies. Infrastructure is an important angle but it’s not everything.” — (MEES)
© 2001 Mena Report (www.menareport.com)
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