Privately Does It

Boursa Kuwait Securities Company (BKSC) was established in 2014 as part of the privatization plan for the KSE. What were the reasons for establishment?

The KSE was founded as a self-regulatory entity in 1983 and operated as such until the promulgation of the Capital Markets Law in 2010, which brought about the formal establishment of the Capital Markets Authority (CMA) as the regulatory body for all securities activities in Kuwait. In recent years, the Kuwait Stock Exchange (KSE) has trailed its regional peers and has witnessed a decline in liquidity exceeding 80% in the last 10 years and while the Dubai Financial Market index, for example, has recorded growth of nearly 170% in the last five years, the KSE index has increased by only 5.5%. The weak fundamentals and the acknowledgement of the need for structural reform in the KSE has prompted legislators to privatize the exchange to enhance its financial agility, improve its decision-making processes, and expand its access to capital in general. Privatization would also shield the stock exchange from government interference in operations and management and allow for a separation between shareholders, management, and traders. This brings us to BKSC. The company was established in April 2014 with an authorized capital of KD60 million by the Capital Markets Authority Commissioners’ Council resolution 37/2013 and the preamble to law 7/2010. Our current goal is to assume administrative control of the KSE and to begin a 46-step strategic transformation plan that we have devised with input from all stakeholders to improve the exchange’s current performance, turning it into a leading, regional market. It is important to note here that law 7/2010 also outlined the ownership structure of the exchange, dictating the sale of 50% of the exchange to Kuwaiti citizens in an IPO, a percentage not less than 6% and not more than 24% to be allocated to government bodies and a percentage not more than 44% and not less than 26% to be auctioned to an international operator.

How will the privatization of the KSE impact the financial market in Kuwait and what does it signify about the transition occurring in Kuwait’s economy?

The privatization of the KSE is pending the enactment of law 22/2015 in 2015. This law amends certain articles of law 7/2010, including article 156, which grants the CMA the right to appoint BKSC to manage and operate the KSE during the transition period. This will last until the finalization of the privatization process as stipulated by article 33 of the same law. However, the change in legislation signifies that Kuwait is on a path of much-needed economic diversification, which was made all the more obvious by the recent decline in oil prices over the last year. There is value in the non-oil private sector that needs supporting legislature to allow it to reach its full potential, and that is what we are seeing now with the move to privatize the KSE. Additionally, the public sector in Kuwait is quite large; it accounts for 70% of GDP and employs nearly 80% of the total Kuwaiti workforce. Public-sector salaries in 2014 amounted to nearly 19% of Kuwait’s GDP ($181 billion)—quite a staggering figure. The government is gradually reducing its role as an operator and focusing on being a regulator. The approval of a $116 billion development strategy for 2015-20 will see an increased role of the private sector from its current 26.4% to more than 40% and the positioning of Kuwait as a financial hub. A successful example from the region of a privatized exchange is the Dubai Financial Market (DFM), which was established in 2000 as a public institution and was transformed into a public joint stock company in 2005. Liquidity on the DFM jumped from 12.6% in 2005 to 158.5% in 2007, two years after its privatization. Market capitalization increased from $86.9 billion in 2005 to $138.2 billion in 2006.

How are you working to enhance communication with investors and improve both local and international investor relations within the KSE?

While BKSC exists and has been operating behind the scenes to prepare for this transformation, we plan to take control as an operator of the stock exchange in 2016, at which point we will begin our communication protocols with investors. Our priority currently is to prepare for a smooth transition of operatorship and prepare to upgrade the KSE’s infrastructure. From December 2014 to March 2015, we collaborated with the Boston Consulting Group to conduct an in-depth market-scanning exercise, benchmark best practices applied by global peers, and carried out an in-depth analysis of KSE’s financial performance and operational infrastructure. Not only that, but over 2,300 hours were invested and intensive meetings were held with more than 65 stakeholders and market leaders including banks, investment and brokerage firms, business associations, and listed companies to understand the needs and concerns of all stakeholders.

Where does the KSE stand today, with regards to investor best practice standards, and where would you like it to be in the future?

Today, the KSE is getting a new lease on life. Although it is one of the oldest stock exchanges in the Gulf, it has been recording gradual declines in liquidity over the last 10 years from a high of KD33.9 billion in total value traded in 2007 to a record 10-year low of KD5.9 billion in 2014. This has partly been due to the lack of products meeting international standards and outdated infrastructure amidst growing investor requirements. As a result, the KSE today trails behind other stock exchanges in the Gulf in several metrics including value traded as a percentage of market capitalization, which dropped from 37% in 2007 to 19% in 2014 and value traded as a percentage of GDP—a metric that reflects the stock market’s health versus the health of its domestic business environment. Between 2010 and 2014 alone, the KSE’s value traded as a percentage of GDP dropped from 36% to 11%, while all other regional markets registered positive growth rates (some as high as 2.5 times).

What are your expectations for the BKSC in 2016?

In our capacity as the new operator of the exchange, BKSC will execute a transformation program to evolve the KSE into a leading regional exchange that reflects the size and depth of Kuwait’s private sector while implementing global transparency rules and standards to attract regional and international investors. We are currently working on preparations for the operations’ takeover of the exchange, which we expect to happen in early 2016. Once the takeover takes place, our plans will then shift to upgrading the operations of the stock exchange, and the development and initiation of a detailed operational takeover plan consisting of 46 strategic initiatives, each of which contains multiple projects to ensure swift transition of systems and high-priority processes. In 2016, our objectives are to upgrade the systems and the stock exchange infrastructure.