Mohammed Bin Rashid al Maktoum, the Crown Prince of Dubai, is a man who is rarely denied. When the prince decided to plunge into horse racing, it was only a decade or so before his Godolphin stables came to dominate European tracks. When he decided to turn his sun-baked postage stamp of an emirate into a major regional tourism and business center, it wasn't long before the Dubai skyline sported some of the world's tallest towers -- and the Gulf was dotted with man-made islands shaped like palm trees.
And for the past three years, Sheikh Mo, as he is widely known, has been driving his aides and a team of international financial experts to build something even more ambitious: a Gulf bourse that will attract global investors and enhance Dubai's status as a commercial hub. On Sept. 26 this latest creation, the Dubai International Financial Exchange (DIFX), begins operations.
The new exchange's early days are likely to be modest -- maybe only a few trades will blip across screens linked to its computers. An exchange official says the DIFX will start trading as many as five index-linked equity products that are also traded elsewhere so their performance can be easily monitored. But the institutions that are likely to become members from the beginning, including Credit Suisse (), HSBC (), and Deutsche Bank (), as well as regional players, have big ambitions for the DIFX. "It has taken many years and a lot of hard work, but we're very excited by the opportunities the DIFX offers investors in the region," says Michael Philipp, CEO of Credit Suisse for Europe, the Middle East, and Africa and a DIFX board member.
TIME OF TRANSITION
With oil prices hovering around $60 per barrel, the Middle East and the Gulf are awash in cash. The four regional big hitters -- Saudi Arabia, Iran, Kuwait, and the United Arab Emirates -- are likely to rake in a total of $276 billion in oil revenues this year, according to Washington-based researcher PFC Energy. The surplus money has supercharged the region's markets. Stocks in Kuwait are up 59% this year, while those in Egypt, Jordan, and Saudi Arabia have surged over 80%. If the DIFX takes off, it would give companies and investors a venue for initial public offerings and other deals that could attract both regional and global capital looking for an alternative to lackluster Western markets. "They are making every effort to become the New York Stock Exchange or London Stock Exchange of the region, and I believe they will succeed," says Jameel Akhrass, London-based head of Middle East investment banking for Morgan Stanley, which is planning to become a member of the DIFX.
Akhrass and other bankers think the DIFX could also prove to be an important resource for the region's corporations and investors. Not only are many Gulf companies stuffed with cash, but they are on the verge of a transition, with the founders of family-owned outfits either nearing retirement age or past it. Their offspring are thinking about cashing out or raising capital through markets such as the DIFX to take their companies global. Once a family company goes public, it is likely to attract investment from other wealthy families interested in buying stock in businesses they know well. "This will broaden the investor base here. We clearly see demand from very large family companies," says Beat Naegeli, the Dubai-based Middle East private banking head of Credit Suisse.
Some companies are already doing the preparatory work for DIFX listings. Investcom LLC, which is controlled by Lebanon's Mikati family and operates mobile-phone networks in Cyprus, Syria, and Yemen, says it plans to be among the first companies to list on the DIFX. Investcom has already moved its domicile to Dubai from Luxembourg, says a spokesman, because Dubai is "a regional hub" and thus attractive to the company's Middle Eastern management and employees. The offering, which may be in the $700 million range, is being handled by Citigroup () and HSBC. Morgan Stanley is working on another potentially large offering by Showtime Arabia, a Dubai purveyor of broadcast entertainment that is controlled by Kipco, a Kuwaiti investment company. (Viacom Inc. () has a minority stake.) DIFX Chairman Lynton Jones says there are a total of 12 to 15 IPOs in the pipeline, ranging from $50 million to $1 billion. Jones also expects dual listings from regional blue chips that are already traded on local exchanges.
Big-time bankers used to turn up their noses at the Middle East because deals were too infrequent and too small. But with market values booming, banks are chasing lucrative transactions such as last year's $3.5 billion sale of a second Saudi mobile license to the United Arab Emirates' Etisalat. Goldman Sachs & Co. () and Cairo-based EFG-Hermes handled the deal. The other attraction is the huge amount of petroleum wealth going into local bourses.
COURTING GLOBAL PLAYERS
Bankers complain, however, that none of the regional exchanges is well-suited to listing companies that want an international following. Across the Middle East, local markets are too restrictive, too parochial, or insufficiently transparent for global investors. The market capitalization of the Riyadh exchange, for instance, is $550 billion -- larger than that of China's domestic exchanges. But foreigners can invest there only through bank-run mutual funds.
The DIFX looks as if it could be the solution to such problems. Investors from everywhere will be able to buy and sell easily through big member banks. The exchange will quote its listings in dollars, and regulations are modeled on those of Britain's Financial Services Authority, which regulates the London Stock Exchange. To further reassure investors, the exchange's board of directors includes international bankers as well as regional figures. And its own regulatory body will operate separately from the sometimes freewheeling financial institutions of the United Arab Emirates, of which Dubai is part. "What we are trying to do is cater to international institutional investors," says DIFX Chairman Jones. "We aren't trying to be just a market for Dubai or UAE products." Indeed, Jones hopes to attract listings from as far away as India and Pakistan. One reason that may happen is that many Dubai businesspeople and traders originally came from South Asia, and the emirate is a popular destination for Asian tourists.
The DIFX will operate in an impressive setting: The exchange is housed in a massive complex known as the Dubai International Financial Center, where retail brokers, asset managers, and other service providers will have offices. The financiers and their families will live and shop in a new retail-and-residential development being built nearby around an artificial lake. Its centerpiece is to be the spiky Burj Dubai, one of the tallest buildings in the world.
Of course, the financial world is overpopulated with alumni of failed bourses -- including Jones, who once chaired Jiway, a Morgan Stanley-backed pan-European exchange that expired in 2001. The main problem for the DIFX, Jones concedes, is that it has no track record. He says investors tell him they are interested, but they want to make sure the exchange functions properly and is well-regulated. That's why Jones wants to go slowly at first.
Another potential worry: regional rivals. When Dubai's leadership conceived the plan for the international exchange, most of the region's markets, including the Dubai Financial Market, the local bourse, were peanut-sized and going nowhere. But with oil money flooding into the Mideast and investors there leery of parking their money in the U.S. and Europe, exchanges in places like Cairo and Abu Dhabi are finally thriving. Local markets are also getting their houses in order by stepping up regulatory action. UAE financial overseers recently canceled $2.6 billion in trades on the Dubai Financial Market that they deemed fishy. "This is the first time the regulators have shown any teeth," says Mustafa Abdel-Wadood, chief executive of EFG-Hermes (UAE).
Now that rival exchanges have come alive after years of torpor, some observers question the need for a pan-Middle East exchange. After all, many of the stocks involved are already traded in locales such as London and Cairo. The big banks are betting otherwise, and so is Sheikh Mo.
By Stanley Reed in Dubai