Interview: Iraq bourse boss Taha Ahmed Abdulsalam Al Rubaye

The Iraq Stock Exchange has been boosted by the recent Asiacell listing, but chief executive Taha Ahmed Abdulsalam Al Rubaye says that outdated regulations and the absence of proper capital markets and companies legislation is hampering growth in one of the world’s most exciting emerging markets
By Courtney Trenwith
Sat 07 Jun 2014 11:05 AM

On the face of it, Iraq Stock Exchange (ISX) CEO Taha Ahmed Abdulsalam Al Rubaye is in a plum position to impress: with the country’s economy booming at 9 percent and every industry still with huge potential yet to be untapped, there is a copious amount of room for the ISX to grow — up and out.

Already, the exchange has nearly tripled its market capitalisation in the past three years and last year it launched the largest initial public offering (IPO) the Middle East had seen since before the global financial crisis.

Yet, Al Rubaye does not have it easy.

He is escorted to and from work in a secure vehicle, while the ISX building in Karrada district is surrounded by a brick wall topped with barbed wire. The traders he relies on risk their lives every time they step onto the trading floor. And the risk is real: in 2010, a car bomb exploded next door and 53 people were killed.

The number of people that have died in violence across Iraq this year has been the worst since 2008.

But life goes on and the ISX is ticking along with it.

“Sometimes Baghdad is stable but sometimes there are criminals or terrorists … hurting and attacking people in some areas. But the economy is pushing through,” Al Rubaye tells Arabian Business.

“We have work to do, we have responsibilities to [meet]. The investors, especially the non-Iraqi investors, understand there is movement from the terrorists but they are not... the country, we still have the power to manage the work, the job, everything. And many of the managers of those funds invested in the stock exchange visit the stock exchange.”

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Secure or not, Al Rubaye also is fighting a second, often even more arduous, obstacle: regulations that need to be forced through a lacklustre parliament.

Several pieces of legislation related to the ISX and other investments that would indirectly boost the exchange have been in draft form for as many as five years, waiting for MPs and the government to approve and implement them.

The stalemate is significantly hampering the private sector, where much of the potential investment opportunities lie.

“Every year we have 7 percent, 9 percent, maybe [we’ll have] 13 percent growth in the GDP, but when you look at it, you can see about 90 percent coming from oil and the other ten coming from other sectors,” Al Rubaye says.

“I need to see the GDP coming from other sectors. I’m not saying that the oil is not important, it’s important, but I need to see infrastructure and I need to see other sectors [increasing] their percentage of the GDP.”

Ultimately, Al Rubaye is urging reform to boost the private sector share of GDP.

“But the private sector cannot increase their percentage in the GDP unless you change some of your regulations,” he says.

“It doesn’t matter that we are supporting the private sector — it’s not a matter of supporting — you need to make the regulation easy and accessible for Iraqis and non-Iraqis… to encourage the private sector to invest.

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“How can I bring money and invest in a project when there are old methods? I need four to six months to register a company and then [I need to] wire money from side to side. All those kinds of services must be made by banks, by the stock exchange.

“This is what I say all the time: we need to change some articles [in legislation] and make real changes in the companies law and the capital markets law. These will be the leaders to change the economy.”

While things could definitely be better, the ISX is doing well.

Last year, 871 billion shares were traded on the exchange, with a total value of $2.371bn. Following the Asiacell IPO, market capitalisation reached $9bn, with the index closing at 113 points.

Emerging market and frontier research group FMG says in the past five years the ISX has recorded the fastest earnings per share growth of any stock exchange in the world. But share prices are yet to reflect this.

“We are of the view that Iraqi equities have potential for one of the greatest rallies in the developing market universe,” FMG says.

Al Rubaye has been at the centre of Iraq’s trading industry since the former Baghdad Stock Exchange (BSX) was launched in 1994. He endured the economic sanctions imposed on the country during Saddam Hussein’s dictatorship, living off a measly salary whose value plummeted along with the Iraqi dinar. As with most of the country’s highly educated, Al Rubaye was prohibited from leaving.

The BSX collapsed during the US-led invasion of Iraq in 2003 and majority of shares owned at that point were lost or became worthless.

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In 2004, the US helped create the ISX, with Al Rubaye at the helm. It started with a handful of companies that had existed on the BSX and were still functioning post-war.

Trading took place using white boards and an open outcry system until 2009 when it finally went electronic, allowing the exchange to open five days a week, although it is still only open for two hours a day. Advancing to electronic also improved transparency and disclosure and saw turnover significantly increase, while share prices rose closer to their real value.

Foreigners have only been allowed to invest in the ISX since 2007 but still make up less than 20 percent of all trading. However, it has been estimated that between 60-70 percent of shares in Asiacell’s initial listing were bought by foreigners, representing an unprecedented international interest in the ISX. The telecom’s listing was expected to have an ongoing impact on foreign interest in the exchange and there has been some increase, but it’s yet to make a substantial impact. 

But Al Rubaye is confident. He believes outsiders understand the potential of the Iraqi bourse and he still has two all-but-guaranteed large IPOs to come any time soon. Under the terms of their 2007 contracts, the country’s other two telecoms operators — Zain Iraq, a subsidiary of Kuwait’s Zain Group, and Korek Telecom, backed by France’s Orange — must also list at least 25 percent of their companies.

“Foreigners understand [that] there is an opportunity to invest in [the ISX], especially when there is growth in the GDP for Iraq,” he tells Arabian Business. “They understand that the economy will be pushing to be better than we have now.”

Iraq has the fastest growing gross domestic product (GDP) of any economy worth over $50bn, putting it ahead of the likes of China, Libya, India and Qatar, according to the International Monetary Fund (IMF). The economy has been growing by more than 8 percent annually since 2011 and both the IMF and Central Bank of Iraq project a growth rate of more than 9 percent annually over the next few years, while Bank of America Merrill Lynch has said it expects Iraq’s economy to triple by 2024. However, as Al Rubaye points out, the majority of this is reliant on oil, although positively, production has tripled since the Iraq War and, according to Citigroup, could rise to one of the highest levels in the world.

With few advanced non-oil sectors, the ISX is disproportionately dominated by banks; private banks make up 21 of the 82 listed stocks. But this is an opportunity, according to FMG. The industry is dominated by two government-run banks but private banks are gaining market share and rapidly improving on their 10 percent of total industry assets.

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“Profit before tax was up to 29 percent CAGR between 2007 and 2012. Still, we can with ease find quality banks trading below 10x trailing earnings and 1-1.5x book value, despite ample room for further growth,” a recent FMG report says.

“The [banking] market is heavily under-penetrated where only about 15 percent of Iraqis have bank accounts. Also, banks have only ‘dipped their toes’ into conventional banking and are today mostly focusing on foreign exchange, central bank deposits and issuing letters of guarantee.”

Telecoms also are key to the ISX. While Asiacell immediately doubled the exchange’s total market capitalisation to $9bn, the additional billions from Zain Iraq and Korek Telecom listings are expected to lift the ISX off the list of the world’s smallest bourses.

Although they are years behind, Zain, the market leader in terms of subscribers, has hired Melak Iraq and Rabee Securities as its leading advisers and broker. It is expected to launch its IPO by the end of the year, having previously touted June as the expected date, although Al Rubaye says he is yet to receive a request to list.

There is no date yet for Korek Telecom.

Al Rubaye says Asiacell’s successful IPO was unsurprising, considering it was the first telecommunications company to go public in a barely-penetrated sector.

“That’s the reason that we got more than $900m trade,” he says.

Al Rubaye also has his sights set on several more IPOs in the near future. He even keeps a list of all the incorporated companies worthy of targeting.

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“I have a list of about 25 companies non-listed that we are encouraging to come to our stock exchange,” he says. “There are in fact thousands of limited companies; we are encouraging them to transfer to be shareholder companies and after that maybe we can talk about listing.

“We are discussing with their boards, with their CEOs, but it depends if they meet the requirements.

“We don’t have the power to enforce every non-listed company to list. Every year we ask the non-listed companies to join the stock exchange but it depends on their desire. I believe that that area needs to be developed to give some reward for the listed companies against the non-listed companies. Sometimes we ask the regulators to give some benefit for the non-listed companies [to list] and of course we educate the non-listed companies on what are the real benefits — the real benefit is you’re going to have more investment and more shareholders and you’re getting a fair price when you trade your shares.”

Al Rubaye says the forced transparency that goes hand-in-hand with being a public company often turns off family and privately owned firms.

“This is a big challenge for the stock exchange,” he says.

“We are enforcing the listed companies to give quarterly disclosures and yearly disclosures, there is some urgent information we need to publish about the companies, [such as] the price going up or going down for two or three sessions, [the share price change can’t exceed] 10 percent. The company directors don’t like those kind of activities, especially when [at the moment] there are few shareholders with a majority [stake].”

Al Rubaye expects more banks to list this year and he’s working with them to meet the requirements, which include having at least 100 shareholders and the past year’s financial statements.

But the bourse itself also has some much needed improvements to make. Custody services are still limited since National Bank of Kuwait began custodying Iraqi shares last year through Credit Bank of Iraq, of which it owns 80 percent. Developing this further will be crucial because many of the larger institutional investors have mandates requiring their shares be held by custodians.

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Online trading also exists at a limited capacity, with only brokerage firms having access, limiting individuals’ participation in the bourse.

Al Rubaye says he expects to begin studying the implementation of wider online trading once the ISX upgrades to NASDAQ OMX’s X-stream trading system, which is scheduled to go live at the end of July. The new platform, currently used by 25 exchanges globally, including in Abu Dhabi, will be faster and provide greater capacity, he says.

The ISX also has agreed the new platform will host the Erbil Stock Exchange, due to kick off in November. It will be the first exchange in Iraq’s semi-autonomous region of Kurdistan and the ESX, which according to Iraq Business News has $8m in initial market capitalisation and 56 shareholders, hopes to have between five and ten listings by the end of the year.

Al Rubaye says the two exchanges will work together.

He is also pushing for an overhaul of the country’s capital markets law. A draft law written by a committee including representatives from the Iraq Securities Commission and the ISX was proposed in 2009 but remains in the government’s “to do” pile.

“There are many laws in the queue,” Al Rubaye laments. “The private sector is moving fast but it needs more regulation.

“The private sector works at least 12 hours [a day] to finish their jobs and responsibilities. We need to see the government sector also working with us past [normal hours] because at the end of the day we are behind as a country.

“We are a rich country but the process, the methods, we need to push on that side. We used to have the [up-to-date] methods 20 or 30 years ago but it’s not right to continue with the same processes; you need to change. It is no longer “the Iraq finance”, it is “world finance”; you need to be acceptable from the world and the other institutions and you need to understand you are encouraging foreigners to invest in your country, so you must make what he learns in his country easy to find in your country.

“This is what we did with the ISX; we didn’t invent the wheel, we studied what the other countries have... we studied and we took the regulations from other stock exchanges and learnt how they succeed in encouraging foreigners to invest and make it easier for the investors in Iraq.”

With a strong base already and infinite room to improve, investor eyes not already trained on the ISX will surely be turning soon. But, as Al Rubaye warns, the potential will only be realised if politicians lift their game and the security situation does not deteriorate.

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