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 -------------- ¶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 -------------- ¶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 -------------- ¶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