Yemen’s stock exchange:A far-fetched dream? [Archives:2006/955/Business & Economy]

June 15 2006

Interviewed by: Raidan Al-Saqqaf
Finance Minister Dr. Saif Al-Asali has expressed his desire to establish a stock exchange as one component of forming modern economic institutions in Yemen. The Yemen Times spoke with Nabil Al-Sorouri, a renowned auditor and financial expert, about the possibility of launching a stock exchange in the following interview.

YT: Can you tell us about your background?

NS: I am a senior auditor at one of Yemen's leading financial consultantancies. The company audits several of Yemen's major trading and industrial groups. I have specialized in tax monitoring and auditing for the last six years.

YT: What are your concerns with regard the launch of a stock exchange in Yemen?

NS: Yemen is an underdeveloped economy suffering from an unorganized business environment operating with a weak infrastructure; our problems include poverty, corruption and lack of managerial skill. And this affects all business divisions, not only auditing. Therefore bringing-up the subject of a stock exchange is premature and requires a profusion of research and analysis prior to its launch within our underdeveloped business milieu.

YT: Coming from your perspective as an auditor, is Yemen ready for a stock exchange?

NS: In Yemen, information and statistical data are opaque. A stock exchange requires timely and detailed financial information as this data is critical not only for determining the value of shares but also for controlling the rise and collapse of its value. Transparent disclosure of financial information provides shareholders with precise indicators that allow them to decide whether to retain or sell their shares. We don't have that level of accuracy and transparency in Yemen. There are cases where local corporations underreport their earnings and operations to reduce their tax burden. Such a practice might result in creating a false impression of the company's returns and in turn the value of its shares.

YT: Would company shares be in demand if an exchange would open?

NS: One of the reasons why I find it difficult to see how a stock exchange would prosper is the current economic instability in Yemen. We continue to suffer from high inflation and corruption which have created an atmosphere of insecurity; it has become hard for ethical companies to breakeven, while other companies see record profits by taking advantage of questionable dealings and corrupt behavior in collusion with the government. With the limited number of companies in Yemen that might be listed, I think the demand for such shares would be at a minimum.

YT: What if Yemen sees a trend towards privatization?

NS: Privatization is a very different story. It is true that a stock exchange would make the privatization process more transparent, efficient, and public. The privatization of a few government companies, however, will not guarantee the success of a stock exchange. Laws and regulations must be put in place in order to safeguard the interests of shareholders buying into privatized companies. Meanwhile, our current laws are failing to protect many rights and interests.

YT: What would it take to have an operational stock exchange?

NS: The first point would be to conduct a comprehensive study on the feasibility of a stock exchange within the coming years. Such a study should consider the realities of our business environment, the per capita income, the level of discretionary income available for investment, and our economic instability in addition to current phobias in the local market. If such a study favored the creation of a stock exchange, then we would need to formulate a system that would be transparent and effective for managing the affairs of the stock exchange. The government could kick start the operations of the stock exchange by privatizing some 20 government and quasi-government companies such as Yemen Mobile, the Aden oil refinery, and a cement factory among others. If the shares of those companies were traded successfully, this would encourage foreign investors to capitalize our stock exchange. Additionally, such a development would encourage local private companies to go public and have their shares traded, especially as they require liquidity to finance their growth and expand their operations. If these things were to happen, then the stock exchange might be a viable option. Of course, this is the optimistic hypothetical situation that could be achieved provided that enough research would have been conducted, coupled with the recruitment of specialists with expertise in managing stock exchanges, since a stock exchange can also ruin companies and devastate economies.

YT: How could a stock exchange devastate our economy?

NS: The effects of a stock exchange have the potential to be very negative on an economy. If you study the 1997 East Asian crisis, or the recent crash of neighboring stock exchanges, you would see that a stock exchange can transform the 'rosy dreams of shareholders' to a nightmare in a matter of minutes. This is especially the case if financial disclosures were misleading or misunderstood thereby allowing shares to be valued at high premiums or at a discount. When shareholders would come to realize the actual value of their shares are far from their nominal value, they would be pushed to sell, thus destabilizing, and possibly crashing, the exchange. Moreover, many exchanges suffer from speculation and rumors that see listed companies lose millions in market capitalization. Such activities occur frequently in volatile economies such as that of Yemen.

YT: How is reporting a key to the success of a stock exchange?

NS: A stock exchange needs timely financial data that reports on the performance of listed companies, so that investors can be sure that share prices change in accordance with market performance and the expected returns on shares. Currently, the financial management and accounting habits within the country lack enough sophistication to produce daily, up to the minute, financial reports. Additionally, public transparency is still an alien concept to many private, limited-liability corporations, where accounting practices)when extant)having the goal of tax avoidance. Meanwhile, corruption is rooted deep within all government and government-linked corporations. So, we need a fundamental change in accounting and auditing practices to feed the operations of a nascent stock exchange.

YT: What about current governance and taxation laws?

NS: We have tons of such laws, but those laws are not operational in Yemen, resulting in failures such as that of a Yemeni fishing company a few years ago and, more recently, the Watani Bank. These companies failed because they were launched without having a solid corporate governance regulatory system in place to protect shareholders, despite the existence of corporate governance laws in Yemen that are not executed. Moreover, there is no government agency in place to monitor the extant regulations and to oversee the financial management of private and government companies. If a stock market comes into existence without a regulatory body to oversee corporate governance mechanisms, then the example of the Watani Bank will repeat itself again and again, in turn diminishing what little faith investors have in this country.

Moreover, current taxation laws do not promote transparency in accounting. In fact, they encourage companies to strategize in order to report lower than actual profits which, in turn, misleads tax authorities as well as shareholders. Another problem is that we do not have stable tax regulations. Imagine that you would invest in a huge, five star hotel in Yemen and once you begin operating, you learn of a new 5 percent or 10 percent sales tax. Many investors would find such a tax devastating to their profitability and would resort to misreporting profits in order to compensate for the new tax.

YT: What about independent auditors? Is auditing an efficient control mechanism?

NS: There are many stock exchanges that disallow trading of shares unless a company's books are audited by a certified auditing firm. However, bear in mind that a stock exchange is only a middleman and does not have a direct interest in auditing, especially as the costs of an audit are considerable for Yemeni enterprises, which are tiny when compared to their counterparts in the region and globally. Most companies in Yemen specialize in either basic services or in auxiliary manufactured goods and can not support regular audits.

YT: Could a stock exchange in Yemen attract foreign capital?

NS: Yes and no. A stock exchange might encourage enterprising funds to invest in Yemeni shares and in turn provide much needed capital to Yemen's economy. However, local capital has its own fear of investing locally due to painful experiences in dealing with corruption and the abuse of power by authorities. My worry is that unless those problems are sorted out, thereby creating a suitable investment climate, Yemen might gain a poor, international reputation as being hostile to global finance. The capital that investors provide is the main driver of success in any stock exchange and would prove effective in boosting Yemen's economy either through a stock exchange or otherwise.

YT: Could reform of the banking sector help to attract global finance?

NS: Yes. There are two main ways of acquiring financing for businesses. The first method is to raise capital through a stock exchange and the public offering of shares. The second method involves borrowing money from banks. If Yemen allows international banks, such as Citigroup and the Al-Rajehi Bank, to operate domestically, they would not only boost the economy but would also improve the economy since their accounting practices would spillover to smaller enterprises. These smaller companies would learn to meet international banking requirements in order to borrow capital, ultimately resulting in a reformed, and more sophisticated business and governance environment potentially paving the road to the conditions necessary to open a stock exchange.

YT: Thank you, this interview has been most enlightening and insightful.

NS: Thank you, and i wish you all the very best.