Why the future lies with MENAT

By 2030, the combined assets of Gulf Cooperation Council (GCC) sovereign wealth funds (SWFs) will hit USD7.6 trillion. This was the prediction of HSBC UAE CEO Mohammed Al Marzooqi speaking to the 800+ attendees of HSBC’s seventh annual MENAT Future Forum this February.

The figure not only represents a doubling of the USD3.6 trillion reported in September 2023 but is also equivalent to the annual GDP of the UK and Germany combined.¹ Al Marzooqi said that the overall size and growth rate stands testament to the “translation of the region’s bold ambitions into remarkable economic transformation and reform.”

He noted that this transformation is taking place at a time when governments, corporates and financial institutions face a particularly complex global backdrop to navigate: one marked by “inflationary pressures, economic change, geopolitical challenges, fluctuating oil prices, and potential monetary easing.

“We all wish we had a crystal ball to look into the future,” he told the assembled delegates. “Gathering you here together is about as close as we can get.”

Over the course of the three-day event, a series of influential and informative discussions covered the region’s unfolding regulatory landscape, market developments, digital innovation, sustainability and securities markets infrastructure changes. It all added up to a financial markets growth trajectory, which is increasingly rivalling that of Asia and Europe.

Building strong capital markets

One recurrent theme concerned the implications of this transformation for the region’s capital markets. Here, the changes are continuous and rapid. Steps are being taken to upscale market infrastructure across every single market; from Saudi Arabia’s Financial Sector Development Programme and the Qatar Central Bank’s third Financial Sector Strategic Plan to the UAE’s Centennial 2071 Plan.

Representatives from the region’s exchanges, clearing houses, and regulators explained how and why they are enhancing their product offerings, adopting new technology, in addition to supporting ESG and sustainability programmes. Panelists and keynotes included the leaders of: the Abu Dhabi Securities Exchange (ADX); Dubai Financial Market (DFM); Egyptian Central Securities Depository (ECSD); Kuwait Clearing Company; Muscat Stock Exchange; Qatar Central Securities Depository; Qatar Financial Markets Authority (QFMA); Qatar Stock Exchange, the Saudi Exchange (Tadāwul), plus Muqassa, Saudia Arabia’s securities clearing centre company and Edaa, the securities depository centre of the Saudi Tadawul Group; and the Securities & Commodities Authority (SCA), which regulates the UAE’s financial markets .

In Saudi Arabia, capital markets are playing an ever-more important role in helping the Kingdom to realise Vision 2030. Over the past few years, its issuers have become some of the world’s largest. Attendees heard how the government is also now prioritising the development of deep and liquid domestic capital markets. Several government agencies are working together to develop the market and facilitate investor access.

Where equities are concerned, the operator of the stock exchange, Saudi Tadawul Group, is also working hard to make Saudi stocks more enticing, especially to foreign investors. In 2023, for example, it introduced single stock options contracts.²

Other product enhancements include securities lending and borrowing (SLB) in which Saudi Arabia led the way for GCC in 2021. As of February 2024, attendees were told there have been 2,500 transactions totaling SAR2.5 billion (USD667 million).

Dubai and Qatar followed suit in 2023. In July, HSBC celebrated the execution of the Bank’s first international SLB transaction on the DFM.³

Settlement periods are also being compressed. The Qatar Central Securities Depository (Edaa) has announced that it is reducing the settlement period for transactions executed on the Qatar Stock Exchange from T+3 to T+2.⁴

This followed an active year that saw the launch of a new trading system based on the London Stock Exchange Group’s financial product suite, the introduction of sovereign wealth fund Qatar Investment Authority (QIA) as a permanent market maker, and the first IPO conducted through bookbuilding ^{5 6 7}.

In Oman, the government’s divestment programme has been consolidated under one state authority, the Oman Investment Authority. Attendees heard how it intends to sell shares in 30 companies over the next five years, partly through IPOs and partly through sales to strategic investors. The end goal is to achieve MSCI Emerging Markets status.

Kuwait is also accelerating phase III of its Kuwait Vision 2035 plan after a hiatus during the pandemic. It is setting up a new sovereign wealth fund, Ciyada Development Fund to spearhead domestic growth.⁸

In 2023, the Kuwait Capital Markets Authority (CMA) also introduced a new automated system to improve supervisory work and make daily reporting easier.⁹ It hopes its roadmap for bolstering market infrastructure will enable Kuwait to qualify as a developed emerging market on the FTSE Russell Index within the next few years.

In Egypt, recent moves include the migration of T-Bills from the Central Bank of Egypt (CBE) to the Egyptian Central Securities Depository (ECSD).¹⁰ Bringing Treasury bonds and bills under one platform marked a significant milestone for market harmonisation.

The overall aim is to make the region’s capital markets a more attractive proposition for both existing and potential financial markets players. This includes virtual assets, with a licensing framework for virtual asset service providers launched in November 2023.¹¹

In the UAE, fund manager licenses are now being issued within two months if all requirements have been met.¹² The registration process for foreign funds has also been simplified. And the changes are paying off. Panelists discussed a 55% increase in hedge funds registered in DIFC in 2023.

Moving to net-zero

A second major discussion point concerned the region’s energy transition; a theme accorded particular prominence and momentum in 2023 given the COP28 UN Climate Change Conference was held in Dubai. One participant after another acknowledged the enormity of the task and the trillions of dollars needed.

But they also highlighted how the MENAT region is spearheading ground-breaking initiatives, noting that the region’s fast-expanding solar and wind farms are capturing investors’ attention. They include the world’s largest single-site solar park, which is now under development in Dubai, as is the world’s largest artificial reef.^{13 14} Both were conceived to create carbon credits and protect the Emirates fishing industry.

Creating cost-effective financing mechanisms for these and other sustainability projects is key. Panelists noted plans within the UAE to create a green securities index in partnership with exchanges and index service providers.

In 2023, the UAE also followed up on its 2020 Guiding Principles on Sustainable Finance with three high-level statements focusing on disclosures, taxonomy and corporate governance.¹⁵ In particular, the seven Emirates have strengthened corporate governance frameworks by, for example, clarifying the responsibilities of boards of directors. Governance, sustainability, and annual reports have also been integrated.

Asia MENAT corridor: unlocking future investments

When it comes to cross-border flows, one of the biggest themes in 2023 was the significant growth in the number of direct linkages between MENAT and Asia. Future Forum attendees highlighted Hong Kong’s role supporting this as a super connector to China.

November 2023, for example, saw the launch of the first exchange traded fund (ETF) solely dedicated to Saudi Arabian equities. It is not listed in New York or London but in Hong Kong, highlighting the growing ties between the two regions.¹⁶ Saudi participants said they expect to see several more on other exchanges after witnessing a “huge uptake in terms of investors” on the Saudi Exchange and growing interest in the Kingdom’s capital markets.

Attendees also remarked that while initial Asia – MENAT projects tended to be co-investments with the Chinese government, this is now transitioning to direct sourcing with on-the-ground teams. They also emphasised that their outlook is broadening out from China and India towards other Asian markets including Japan, South Korea, and Vietnam. They concluded that the corridor between the two regions is broadening by the year as MENAT countries accelerate their multi-decade national development plans.

The transformation of the region’s capital market is the bedrock on which the region’s development ambitions are being built. While no one can predict the future, the insights derived from the conference gave everyone clarity on the direction of travel and that the region’s transformation into a global financial and investment hub will continue.