GCC Investors Pour Cash From Oil Revenues Into Equities.

Investors in the six Gulf Co-operation Council (GCC) states are pouring liquidity from soaring oil prices into equities, with at least a dozen initial public offerings (IPOs) and rights issues ready to hit the region's market shortly.

The new issues are likely to mobilise some $3.1 billion in 2004 compared to less than $1 billion in 2003. It is estimated that, by the end of 2005, some $9 billion will be raised through several IPOs in the six GCC states. The oil boom this time is quite difference from the one in the 1970s, when huge amounts of cash used to be pumped to the West - mainly the US - for investment in stocks and real estate as well as treasury bills.

On Nov. 20, Agence France-Presse (AFP) quoted Ziad Dabbas, who heads the capital markets group of the National Bank of Abu Dhabi, as saying: "The high oil prices over the past three years have brought a lot of revenues into the region, and this high domestic liquidity is looking for investment opportunities that are coming in the form of equities.

"Share dealing has made big leaps across the Arab Gulf states due to high profits of the trading firms as a result of an upswing in the economy, strong oil prices and high public and private spending".

Some share yields have exceeded 4%, while interest rates on deposits do not exceed 1.5%. And the recent IPOs have all been heavily over-subscribed.

In Saudi Arabia, the Sahara Petrochemical Company's IPO was over-subscribed. Sahara, controlled by the Al-Zamil industrialist family, was established in early 2004. Its SR300 million ($80 million) IPO, representing 20% of its share capital, was over-subscribed 22 times. The sale was managed by the Consulting Centre for Finance & Investment (see gmt21cNov22).

In the UAE alone, the IPOs of Amlak Finance, Finance House and Arabian Technical Construction were over-subscribed 33, 78 and 64 times, respectively.

The Ettihad Etisalat Consortium, the second mobile phone operator in Saudi Arabia, raised $267 million after recently floating 20% of its stock.

Saudi economist Ihsan Bu Hulaiga was quoted by AFP as saying: "The stampede by investors for shares is also to take advantage of record corporate performance and the psychological fears of investing abroad. The primary market activity has been spurred by the secondary market performances in the past three to four years".

Bu Hulaiga added that most of the listed companies "have posted impressive profits with healthy returns. However, post-Sept. 11 [2001] fears still persist and Gulf investors now prefer to invest at home rather than in the US".

Dabbas said capital flow from GCC states to other markets is very slow, adding: "There is this sentiment, not only in the Gulf but across the Arab world, about investing in domestic markets. Investors fear their money could at any time be frozen in the US or some other market".

Buoyed by the success of the recent IPOs and given the growing appetite for stocks, a string of new IPOs are in the offing. Of these, two in the UAE have already opened - the $18.75 million Salam Bank and $224 million Addar Real Estate Company IPOs. Two more due to be staged in the UAE before end-2004 are $300 million by Damas Jewellery and $100 million by Emirates Foodstuffs and Mineral Water.

In early 2005, there will also be the partial sale of Kuwait Finance House, the main Islamic bank in the oil-rich emirate, totalling $1 billion. Also expected next year is a $400 million IPO by Saudi Arabia's Al-Bilad Bank.

There will be increased GCC opportunities in 2005, with more IPOs and at least eight planned privatisation projects totalling some $2.6 bn set to take place. State-controlled QatarGas, Bahrain Telecommunications Co. and courier major Aramex are all selling stakes.

The resurgence of IPOs in the GCC markets is the by-product of several factors. The recent economic optimism and strong performance of the Arab stock markets has boosted investor confidence in the domestic stock market and increased their appetite for listed shares, including new issues.

Secondly, the regulatory changes expected to take place bode well for the future of the IPO market.

GCC markets are awash with liquidity and companies have sensed the sentiments of investors who are starved of investment opportunities. Hence, so many IPOs. For companies to compete and be well capitalised there is no way but to increase their capital through public issues.

In Iran, meanwhile, there is no boom and the huge amounts of oil revenues pouring into the theocracy have not improved socio-economic conditions.