YEMEN TAKES STOCK OF A STOCK MARKET

C O N F I D E N T I A L SANAA 001533

SIPDIS

DEPARTMENT FOR NEA/PI FOR DAS KENT PATTON
DEPARTMENT FOR NEA/ARP FOR ANDREW MACDONALD
ABU DHABI FOR US TREASURY FOR MIKE GRIFFERTY

E.O. 12958: DECL: 09/13/2018
TAGS: ECON EFIN ETRD KMPI PGOV PREL JO YM
SUBJECT: YEMEN TAKES STOCK OF A STOCK MARKET

Classified By: Ambassador Stephen A. Seche for reasons 1.4 (b) and (d).


1. (C) SUMMARY: The Yemen Government is proceeding full
steam ahead with establishing a stock market. A supervisory
committee has been formed and the Financial Services
Volunteer Corps has been invited to conduct an in-country
evaluation in October 2008. Afterwards, a technical
implementation unit will be formed to undertake activities,
such as reforming the judicial/legal system and raising
public awareness about transparency and corporate governance.
The ROYG will need to overcome numerous formidable obstacles
in order to make the stock market a reality. END SUMMARY.


2. (C) In a September 8 meeting, Deputy Finance Minister
Jalal Yaqoub told Econoff that the ROYG established a
"Supervisory Committee" to oversee implementation of a stock
market, led by Deputy Prime Minister for Economic Affairs
Abdulkarim al-Arhabi in May 2008. (Note: Formation of the
committee immediately followed a Yemeni delegation's study
tour in New York and Washington organized by the Financial
Services Volunteer Corps (FSVC),which included visits to the
New York Stock Exchange (NYSE),Nasdaq, the Mercantile
Exchange, the Securities and Exchange Commission and the
State Department. End note). Yaqoub noted that the
supervisory committee invited the FSVC to visit Yemen the
last week of October 2008 to conduct a one-week study leading
to a status report which will serve as a "Road Map" for
establishing the stock market. The report is expected to be
released at the end of 2008 at a total cost of USD 140,000.


3. (C) Based on recommendations from the report, Yaqoub
said that the Ministry of Finance will set up a technical
unit to implement the project. It will concentrate on five
areas: 1) drafting a transparent and non-contradictory
capital markets law and modifying other laws as needed; 2)
training judges, lawyers, accountants and brokers on
disclosure, transparency and other issues; 3) choosing the
right infrastructure for the stock market; 4) raising public
awareness about stock markets; and 5) strengthening corporate
governance. He hoped that FSVC consultants would run the
unit, as the ROYG lacks the capacity to do so on its own. He
emphasized that the ROYG will need donor assistance, possibly
through programs like the FSVC, the U.S. Department of
Commerce's Commercial Law Development Program (CLDP) and the
Center for International Private Enterprise (CIPE).

CONSTRUCTING A STOCK MARKET THAT FITS YEMEN
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4. (C) Yaqoub said that in setting up the stock market, the
ROYG would either adopt a model from the New York Stock
Exchange, Nasdaq or London Stock Exchange or enter into an
agreement with an existing stock exchange in the region (like
Amman). He said that construction of a stock market would be
financed mostly by the ROYG, but that it would approach
donors for assistance as well. Central Bank Subgovernor
Ibrahim al-Nahari informed Econoff on September 9 that the
ROYG would initially run the stock market, but eventually
turn over its management to the private sector. (Note: CAC
Bank Chair Hafedh Mayad recommended that the management
should be separated from the ownership of the stock market in
order to ensure efficient operations. End note.) An
independent Securities and Exchange Commission (SEC) would
regulate the stock market.


5. (C) Al-Nahari said that both public and private sector
companies would be listed in a future stock exchange. Public
sector companies would be the first listed. Once the the
stock market is operational, private sector investment would
follow. Al-Nahari opined that younger private businesses are
more eager to participate in the stock market than older,
established family businesses. CAC Bank Chairman Hafedh
Mayad seconded this opinion in a September 10 meeting with
Econoff, stating that large family businesses currently make
exorbitant returns on investments in banks and that they
would make fewer profits in the stock market, where share
prices are based on supply and demand rather than on black
market rates. Companies would not be allowed to participate
without meeting full disclosure requirements, according to
al-Nahari. Participating in a stock exchange would force
large family businesses to be accountable to shareholders and
to meet strict corporate governance and full disclosure
standards, something such businesses have not done in the
past.

OBSTACLES

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6. (C) Yaqoub noted a number of obstacles that would need
to be overcome to establish a stock market. He said the
judicial and legal system needs to become more transparent
and independent, and added that judges and lawyers will need
appropriate training. A transparent capital markets law will
also need to be developed and banking laws will need to be
amended to address transparency, disclosure and bankruptcy
issues. According to al-Nahari, the Central Bank has already
submitted to the Parliament amended commercial banking and
Islamic banking laws. Another challenge is how to boost
public awareness about corporate governance, transparency,
and anti-corruption issues as well as how to inform the
public about stock market operations. CAC Bank Chair Hafedh
Mayad added that people managing the stock market would have
to be trained, since currently there is no capacity in Yemen.
Finally, Yaqoub mentioned that most Yemenis may be reluctant
to invest in a stock market because they do not use banks and
invest most of their funds in real estate.

COMMENT
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7. (C) Significant obstacles stand in the way of the ROYG's
ability to create a stock market. Nevertheless, the effort
undertaken to realize the goal will encourage the ROYG to
look at much-needed reforms. END COMMENT.

SECHE