The Search for Liquid

By official reckoning, the economy of the Sultanate of Oman seems set for a 2016 deficit of OMR3.3 billion (USD8.6 billion), or 38% of total estimated government revenues. Tellingly, too, in 2015 hydrocarbons accounted for a huge, yet familiar 78% of the total. And as oil flounders in its new shallows, Oman’s related revenues in 2015 shed 24% YoY. Its drive toward economic diversity dates back to the 1980s, a necessity of which was the emergence of viable capital markets. The race, then, was on to foster awareness of investment, saving, and corporate growth with emphasis on private-sector initiative.

The state remains a major force in Oman’s economy. Qais Abdullah Al-Kharusi is the CEO of the Oman Brunei Investment Company, a private equity fund established in 2009 as a 50-50 JV between the governments of Oman and Brunei. From Oman’s perspective, the State General Reserve Fund’s (SGRF) purpose was to invest in non-listed companies engaged in sectors best serving the goals of the nation’s Vision 2020, such as tourism and the Sultanate’s pioneering aircraft leasing joint venture, where “part of our motivation, other than creating a new industry, was to give investors in the country a high yielding asset class, especially in this environment where low yields prevail.“

The purpose of the brief macroeconomic sojourn above is to bring into sharp relief the need for an accelerated rethink of the local commercial environment. Talking with TBY, HE Abdullah Salim Abdullah Al Salmi, the Executive President of Oman’s Capital Market Authority (CMA), makes a salient point on the viable continuity of local businesses. “It is evidence-based to say that very few family-owned businesses continue past the second or third generation. This is quite significant since the bulk of private companies in Oman and the GCC are family owned.“ More pressingly yet is the fact that Oman still has over 60 state-owned entities that continue to drain the national coffers. Notably, in November, Oman Trading International (OTI), established in 2006 as a JV between Oman Oil Company (OOC) and Vitol, became 100% state owned as the latter relinquished its stake.

IPOs: A Timely Solution?

Naturally enough, a bourse is only as good as the liquidity it commands, in turn contingent upon the scale of the stocks traded there. IPOs reflect capital market vitality and government confidence in long-term economic performance. Essentially, they are a shot in the arm for investor sentiment. The Muscat Securities Market (MSM) has lacked a significant presence of large liquid stocks, and few firms have been 100% free-floating, curbing their liquidity-raising ability in times of need. In contrast, government IPOs have historically reeled in both foreign and local investors, where Omantel and energy stocks Al Manah and Al Kamil prove the point. The Oman Centre for Governance and Sustainability (OCGS), set up in 2015 by a Royal Decree to foster long-term business thinking, is part of the solution, but there is also a drive to encourage SMEs down the IPO path. Oman’s Finance Ministry, too, has taken note, and seems committed to a renewed burst of privatization that would ultimately appeal to investors, albeit without a clear calendar. The government stake in Salalah Port Services Co has recently been transferred to Oman Global Logistics Group, considered a step prior to an IPO. More urgently, the government is to sell a 49% stake in Muscat Electricity Distribution Company (MEDC) through both private placement and public listing on the MSM.

The Muscat Securities Market The very origins of the Omani capital markets stretch back to 1971, when Oman Hotels floated shares as the Sultanate’s first joint stock company. Ultimately there were 71 companies at the end of the market’s first phase, comprising 23 closed joint stock companies and 48 public joint stock companies. The state-owned MSM was established by the Royal Decree (53/88) of June 21, 1988 to take the Sultanate’s financial sector to the next level. A further decree in late 1998 promulgated the market’s sole depository, the Muscat Clearing & Depository Company (MCD). Settlement is made through a Settlement Bank, while a Settlement Guarantee Fund (SGF) ensures investor safety from a listed company’s potential default. And then in late 1998, the Capital Market Law distinguished the MSM from its new regulator, the Capital Market Authority (CMA). The CMA, incidentally, is also the Sultanate’s insurance sector watchdog. These steps cemented the reputation of a sound and transparent investment address of global repute in terms of transparency. Recently, to pursue best practices and avoid potential conflicts of interest, the CMA has also moved to curb the volume of non-auditing services provided by auditing companies.

For 2015 the MSM’s Market Capitalization (MCap) peaked at OMR15.8 billion, and bottomed at OMR14.65 billion in August. As of August 2016, MCap stood at USD38.4 billion, and 20 brokerage firms were facilitating the trading 117 stocks, 37 of which are sharia compliant. The top-five brokers accounted for a 62.96% market share year to July 2016. Regular trading hours are from 10:00 to 13:00 local time, every day excepting Fridays, Saturdays, and official holidays. Settlement for traded securities is (T+1) for bonds and (T+3) for shares.

The Benchmark of Sentiment

Stocks on the MSM are allocated into one of three markets. The Regular Market features strict listing requirements, whereby companies must have a demonstrable history of profitability. The Parallel Market is less strict, and therefore more suitable for newer enterprises, especially SMEs. And finally, the Third Market features companies undergoing financial difficulties, and, therefore, is under close scrutiny.
The MSM30 Index features the 30 most liquid stocks from the three sub-indices of Banking & Investment, Industry & Services, and Insurance. Data for 2015 confirms the deflated mood at the MSM resulting from global headwinds and the oil burden. The MCM30 Index closed the year at 5,406.22, down 937 points, or 14.77% YoY. MCap rose 8.34% YoY to OMR15.78 billion. Trading value reached OMR1.39 billion on a daily average of OMR5.6 million, down 38.75% YoY. The Financial Sector Index (down 15.99% YoY) ruled the roost for trading value on 56.13% of the total (OMR750 million), the Services Sector (down 5.99% YoY), on OMR370 million, claimed 26.6%, while the Industrial Sector Index (down 19.06% YoY) on OMR216 million held a 15.56% stake. The MSM Shariah Index shed 11.48% YoY in 2015. A more recent portrait, that of October 2016, is no more cheerful. The MSM30 Index shed 244.76 points, or 4.27% MoM, while the MSM Shariah Index closed at 841.07 points down 3.82% MoM. October’s trading value rose 42.24% to OMR77.50 million, while the daily average reached OMR3.69 million from September’s OMR3.41 million. The value of shares bought by non-Omani investors reached OMR13.52 million, or 17.45%, while their value of shares sold was at OMR21.04 million, or 27.14% of the total for the month.