A long-running debate about the need for more transparency in the region has intensified since the Dubai World debt restructuring announcement sent global markets reeling last year. The chorus calling for more disclosure has grown so loud, in fact, that the very notion that companies and governments ought to be more open about what they are doing, how they are doing it and why has become hackneyed. By now, the transparency debate is officially a tired one.
Why has transparency become such a limp, almost academic, topic? It is simple. Nobody is listening. Many companies still are not releasing financial results in full and on time, admitting where they have gone wrong and setting forth plans to correct their errors. For evidence of that, one need look no further than the numerous examples this year of results that cleverly emphasise full-year profits for last year to conceal fourth-quarter losses.
It is a strategy as neat and easy as turning a cushion to cover a conspicuous stain. Much as we would like to believe otherwise, many companies in the Gulf appear to be hoping that this financial crisis will blow over like a brief nightmare. The aversion to openness might be about to change, though. And if more disclosure does become the norm, it will not be because of the economists, consultants, columnists and even regulators who have been making waves about it.
Instead, the drive towards openness will be led by markets in what could be one of the most positive long-term results of the Dubai World debt restructuring. The change is already in the air. When Dar Al Arkan, Saudi Arabia's largest property developer, decided late last year that it wanted to raise money to build villas and other projects in the kingdom, it put out feelers and decided to go for as much as US$1 billion (Dh3.67bn) through an Islamic bond.
Unicorn Investment Bank, an Islamic institution based in Bahrain, helped arrange the transaction, eventually raising $450 million. It wasn't the amount Dar Al Arkan wanted, but it was sufficient - and in the post-Dubai World world, almost laudable. The sukuk was the first to be issued in the Gulf since the end of last year, and according to Ikbal Daredia, the head of capital markets at Unicorn, it would not have been possible if the company had not been willing to open up.
"It's all about high-quality issuers who are willing to be fully transparent with their financials," he said. "The days are gone where there were issuers who came to the market with very little or no information and were able to raise money." Indeed, as investors grow pickier, transparency is increasingly important in determining who gets financing and who does not. And when billions of dollars are on the line, more companies and governments will buy into the idea of opening up.
The same principle applies to equity markets: in the new financial order that is emerging from the global downturn, investors will not be as willing as they once were to put money into companies they know little about. In theory at least, that provides a strong economic incentive for those companies to report their financial results fully and on time. The credit ratings agencies are also forcing the issue. All three major international agencies - Standard & Poor's, Fitch Ratings and Moody's Investors Service - have recently backtracked on long-held assumptions about government support for state-owned companies in the Gulf.
One result of those moves has been a demand for more detailed financial information from government-owned companies in the absence of presumed blanket government support, a phenomenon that could lead to more openness. Since ratings directly affect how much money companies can borrow and what interest rates they must pay, these changes provide a clear motive to tell more. If you do not tell more, you either will receive lower ratings or will not be rated at all, severely hampering your ability to borrow and grow.
The bottom line is that nowadays, anyone who wants to build a big tower, expand a business or buy out a smaller competitor with financing from investors will have to play a game of show-and-tell as never before. The academics, analysts and economists - and, yes, columnists - who have been harping on the tired transparency issue for years will probably snatch some of the credit for the embrace of openness. Companies and governments, however, don't care about such principles unless there is money at stake.
Now, in the aftermath of the global crisis and the Dubai World restructuring, there is plenty of that. @Email:email@example.com