US embassy cable - 05DOHA861

UNCLAS SECTION 01 OF 03 DOHA 000861 
 
SIPDIS 
 
STATE FOR NEA/ARPI, INR/EC AND EB/CBA 
DEPARTMENT PASS TO USTR-JBUNTIN 
USDOC FOR 4520/ITA/MAC/ONE-MTALAAAT AND 
4520/ITA/MAC/AMESA/OME-CLOUSTAUNAU 
USDOE FOR GEORGE PERSON AND GINA ERICKSON 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, QA 
SUBJECT: DOHA SECURITIES MARKET OPENING TO FOREIGN 
INVESTMENT FUELS GROWTH AND CONCERNS 
 
REF: (A) 04 DOHA 338 (B) 04 DOHA 54 
 
1. Summary.  On April 3 the Doha Securities Market (DSM) 
opened up to allow greater yet limited foreign investment in 
all sectors of the economy.  The opening of the DSM has 
created a lot of excitement and speculation among Qatari 
investors who see opportunities to create wealth.  However, 
foreign investors have been reluctant to investment in the 
DSM due to several concerns regarding legal protection and 
transparency of information.  There are also concerns among 
Qataris that local investors could be adversely impacted due 
to their lack of understanding about investing in the stock 
market.  End Summary. 
 
EMIR'S VISION FOR DSM 
 
2. The DSM is an important part of Emir Sheikh Hamad bin 
Khalifa Al-Thani's vision for the Qatari economy.  The Emir 
is focused on developing a modern, diverse and dynamic 
economy that creates wealth for the state and its citizens 
while reducing dependence on the government, provides 
business and employment opportunities for Qataris, and 
attracts foreign investment (Ref A).  The DSM was established 
in 1995 by Emiri decree to privatize state companies and to 
allow Qataris to become actively involved in Qatar's economic 
development and prosperity. 
 
GROWTH OF DSM 
 
3. In 1997, the DSM opened with an initial market 
capitalization of Qatari Riyal (QR) 5 billion  or $1.4 
billion (Ref B).  According to DSM statistics, market 
capitalization reached $90 billion at the end of March 2005. 
The daily trading volume has grown from QR 5 million ($1.4 
billion) in 1997 to QR 500 million ($138 million) during the 
first three months of 2005.  From January to March 2005 the 
DSM share price index grew 45%.  In 2004, the DSM appreciated 
65% in comparison to 2003.  In 1997, there were 17 companies 
listed when the DSM opened and now there are 31 companies 
being traded in primarily four sectors: banking, insurance, 
cross-border services (GOQ monopoly Qatar Telecomm or Q-Tel), 
and industry dominated by state-owned companies like Qatar 
Steel Company (QASCO), Qatar Petrochemical Company (QAPCO), 
Qatar Fuel Additives Company (QAFAC), Qatar Fertilizer 
Company (QAFCO) and Qatar Vinyl Company (QAVCO), which are 
collectively known as Industries Qatar. 
 
 REASONS BEHIND DSM GROWTH AND SPECULATION 
 
4. Qatar's booming economy, the GOQ's ambitious economic 
development plans, foreign investment in the hydrocarbons 
sector, excess liquidity in the region and speculation are 
the reasons behind the  growth of the DSM.  Qatar's GDP 
growth has averaged about 15% between 1999-2003.  In 2004, 
GDP growth was estimated at 20.5% or 9% in real GDP terms 
indexed for inflation.  The economic growth has been fueled 
by high oil prices, the diversification of the energy sector, 
particularly the development of Qatar's  natural gas 
reserves, and a boom in construction, infrastructure and real 
estate development. 
 
5. Qatar has an ambitious development strategy which has 
attracted more investment in the DSM.  The GOQ plans to 
invest over $50 billion in the next ten years in roads and 
infrastructure development, health and sanitation projects 
and public utilities.  It is estimated the GOQ will invest 
$150 billion in the energy and industrial sectors.  The GOQ 
is also providing incentives to the Qatari private sector to 
invest in housing, office and real estate development, 
retail, entertainment and tourism. 
 
6. Qatar has attracted an estimated $100 billion of 
investment in the energy sector, with approximately $60-70 
million coming from U.S. energy companies.  It is estimated 
that Qatar will invest and attract over $50 billion in the 
energy sector in the next ten years. 
7. Excess liquidity is another factor behind the DSM's 
growth.  The September 11, 2001 terrorist attacks, Qatar's 
booming economy and ambitious economic development plans have 
enticed Qataris and other Arab nationals to invest in the 
region.  A significant number of Qatari companies and 
individuals and profiting from the economic growth in Qatar 
and the region.  They see the DSM as an opportunity to create 
additional wealth. 
 
DSM OPENS TO FOREIGN INVESTORS 
 
8. The opportunity for limited foreign investment in the DSM 
is arguably the primary reason for the DSM's growth and 
market speculation.  Local economists, financial analysts and 
stock brokers said the January 11, 2005 announcement allowing 
limited foreign investment  in the DSM created excitement and 
triggered speculation throughout Qatar.  Many Qataris 
invested huge sums of money right after the announcement in 
anticipation of foreigners and non-Qatari residents eagerly 
investing in the DSM.  There are stories that some Qataris 
quit their jobs to devote their time to investing in the DSM. 
 
 
9. On April 3, Law No. 31/2004 was enacted to allow foreign 
participation in the DSM.  Foreigners and non-Qatari 
residents are eligible to buy Qatari equities limited to a 
25% cap of the listed company's shares open for trading. 
Foreign investors will not be allowed to access the primary 
market (initial public offerings or IPO).  GOQ officials said 
this cautious approach is to protect the market from heavy 
speculation which occurred in other GCC markets and resulted 
in heavy losses to local investors.  In addition, the GOQ 
does not want foreign domination of the Qatari capital 
market. 
 
FOREIGN INVESTORS CAUTIOUS ABOUT DSM 
 
10. Since the DSM opened to foreign investment, international 
companies and non-Qatari residents have not rushed in to buy 
shares as anticipated by Qataris.  The lack of anticipated 
foreign investment has caused corrections in the stock 
market.  The GOQ and private industry reported the stock 
market has lost almost 26% of its peak value, which on May 1 
was QR 85 billion ($24 billion dollars).  This is a 
significant amount of money given Qatar's estimated GDP for 
2005 is $23 billion based on a conservative oil price of $19 
barrels per day.  Financial analysts predict the downward 
trend in the DSM will continue in the immediate short term, 
noting the market is currently trading on thinner volumes in 
comparison to the first three months of 2005. 
 
REASONS BEHIND FOREIGN INVESTOR CAUTION: NO PUBLIC 
INFORMATION ON DSM REGULATIONS 
 
11. Several Amcits, non-Qatari residents and foreign company 
representatives have expressed numerous concerns about the 
DSM.  The most common concern mentioned by foreign investors 
is there is no clear understanding of the laws regulating the 
DSM.  The GOQ has not yet published the implementing 
regulations for the DSM as it pertains to foreign investment. 
 Without clear "rules of the game," many foreigners are 
reluctant to invest in the DSM. 
 
INAPPROPRIATE REGULATOR FOR DSM 
 
12. A second concern raised by foreigners is uncertainty 
about which GOQ agency is responsible for regulating the DSM. 
 Currently, the Ministry of Economy and Commerce (MOEC) acts 
as the regulator of the DSM.  This is a serious concern for 
foreign investors because they believe the MOEC is not the 
appropriate GOQ entity to regulate the stock market.  In 
2004, Econoff met with DSM surveillance and internal audit 
manager who said the Qatar Central Bank would replace the 
MOEC as DSM regulator (Ref B). 
 
NO CUSTODY LAW 
 
13. A big concern expressed by Amcits and Europeans is that 
there is no custody law in Qatar.  U.S. companies and 
informed foreign investors said the United States, United 
Kingdom and other European countries have custody laws which 
separate the financial entities (or custodians) that receive 
investors' capital from the stock brokers.  Qatar does not 
have a custody law which requires this separation and 
therefore the stock brokers directly receive investment 
capital.  Many foreigners expressed serious reservations 
about investing in a stock market with such risks. 
 
LACK OF PUBLIC INFORMATION ABOUT COMPANIES TRADED ON DSM 
 
14. Public information on DSM-listed companies is not readily 
available in Qatar.  While the GOQ requires government-owned 
companies to publish their quarterly and annual results as 
well as hold shareholders meetings, the lack of transparency 
with regard to statistical data and laws remains a concern 
for foreign investors.  Some foreign investors have stated 
that many well-positioned Qataris engage in information 
sharing amongst themselves, which non-Qatari residents and 
international companies argue is a form of insider trading. 
A number of potential U.S. and European investors have said 
the GOQ needs to establish clear regulations to require all 
publicly traded companies to make their information more 
accessible to help investors make good decisions. 
 
LIMITS ON INVESTMENT 
 
15. Some foreign investors expressed disappointment with the 
25% limit on foreign investment and prohibition to access the 
primary market or IPOs.  They argue that if Qatar is serious 
about attracting foreign investment, the GOQ must provide 
better incentives and opportunities. 
RISING U.S. INTEREST RATES 
 
16. Given that the Qatari Riyal is pegged to the dollar, and 
U.S. interest rates are rising, some investors see this as a 
disincentive to invest in the DSM.  Rising U.S. interests 
rates have caused some foreign investors to put their money 
into bank deposits, which is currently considered as a safer 
use of their money than the risks of stock market investment. 
 
 
ENHANCING INVESTOR EDUCATION AMONG QATARIS 
 
17. Non-Qatari residents have expressed concerns about the 
lack of understanding of the stock market and potential risks 
to investors, particularly Qataris.  They said many Qataris 
who are new players in stock market investing are taking out 
consumer loans, mortgaging their homes or quitting their 
jobs.  They noted that if the Emir wants to create wealth for 
Qataris, the GOQ needs to do more to educate the people on 
the fundamentals of the stock market investment.  One U.S. 
company explained that many Qataris have become victims to 
the recent corrections of the DSM, losing huge amounts of 
money from imprudent investments based on speculative 
information from friends or rumors in the market.  Some 
foreigners have opined that unless the GOQ provides serious 
investor education to its citizens, a significant number of 
Qataris will be adversely affected which would be contrary to 
the Emir's goal of wealth creation. 
 
18. Comment: The opening of the DSM to foreign investment is 
a positive step in implementing the Emir's vision of creating 
wealth for Qatar and Qatari citizens while attracting foreign 
investment.  There are legitimate concerns that must be 
addressed by the GOQ in order to attract greater foreign 
investment in the DSM, in addition to diversifying and 
enhancing Qatar's economic development and growth in a sound, 
prudent manner for Qataris.  Foreign investors realize the 
DSM is a new entity and patience is required while Qataris 
and non-Qataris learn about the laws, regulations and basic 
rules for stock market investing.  What remains to be seen is 
if the GOQ will make the necessary changes and improvements 
to the DSM for Qataris and non-Qataris alike to ensure full 
implementation of the Emir's vision.  End Summary. 
 
 
 
UNTERMEYER