Arab Capital Markets Come of Age
Today’s Arab Middle East faces challenges like no other time in its recent history. The list includes issues pertaining to natural resource management, democratic practices, economic development (poverty, employment, and equal opportunity), and religious and cultural reformation. How such challenges are defined and managed will determine the future of this region for decades to come. How the Middle East’s challenges are managed will also impact its geographic neighbors and economic and political partners and allies. The choices are stark - political development and economic prosperity versus terrorism, migrations, and wars. The financial system of the Middle East is a critical part of the local economies. This financial system can be viewed as two parts: commercial banks, which take deposits and make loans, and are regulated by central banks; and, capital markets composed of issuers of securities, investors in said securities, and intermediaries. In more ways than one, capital market institutions and stakeholders in the Middle East are at the heart of addressing the region’s economic and political challenges. Well-functioning capital markets can play three important roles: 1. facilitate access to finance and growth capital for companies (including SMEs, which account for most of employment and GDP growth in the region); 2. provide mechanisms that enable citizens to store wealth; and, 3. create viable markets so that financial assets and securities can be bought and sold. Capital markets can also play an important role in enabling the average citizen to have a vested interest and stake in the economic development of their country, thus contributing to the peaceful political development of the region. The Middle East’s capital markets are by no means homogenous but that should not restrict an interested observer’s ability to view them synergistically through a common regional prism. From a capital markets perspective, the region is practically four sub-regions with varying degrees of development – the Gulf Cooperation Council countries, the Levant, and the Maghreb. Egypt is a sub-region in its own right. The region’s capital markets share common challenges and aspirations, and some of these include: • How to catalyze and maintain liquidity on the region’s exchanges? How to amalgamate and stitch together otherwise discreet liquidity pools across borders – both geographic and product-specific boundaries? • How to increase IPOs (family companies, state enterprises, SMEs) with sufficient free floats and market capitalizations to attract international investment funds? • How to rise up to international best practices when it comes to disclosure and corporate governance, particularly as these relate to related party transactions? • How to arrive at viable benchmark yield curves and catalyze the growth of secondary markets for corporate bonds? • How to spur the development of the insurance sector to facilitate the issuance of long dated securities? • How to convert stock markets into public shareholding companies and list their shares on their own, and other, platforms? How to arrive at regional and quasi regional stock markets? The vested interests in catalyzing further development and growth of the region’s capital markets transcend stakeholders within the region – • how can the Middle East’s capital markets become an engine of economic growth, utilizing financial resources from within the region and from outside, facilitating domestic investment, FDI, and international portfolio investment? • how can the region’s capital markets contribute to financing the development of needed infrastructure to support critical sectors – water, power (including green energy), education, transportation, and health? • how can the region’s capital markets contribute to employment generation at home, addressing migration pressures on host countries? • how can the region’s capital markets solidify their role in combating money laundering and terrorism finance? Over the past few years, the Middle East capital markets have undergone impressive developments. We have seen upgrades from frontiers to emerging markets, corporatization of stock markets, more inclusions of listed firms in international indices, a visible increase in IPOs and a trend towards listings on international exchanges, wider use of ETFs, and upgrades of legal and regulatory frameworks to international best practices. Local governments, bilateral and multilateral development organizations, and international financial institutions have all contributed to this, as well as the efforts of listed firms, shareholders, investors and intermediaries, and regulators. In addition to building on these successes, the next phase of this coming of age will also rely on the timely, reliable, and relevant delivery of data and information about the region’s capital markets, available to all stakeholders, local and international.
Jul 26, 2022 · 4 min read
In many Arab and muslim countries and communities worldwide, next week marks the beginning of the holy month of Ramadan. The idea that one may achieve spiritual elevation by giving up certain foods and drinks for a period of time is a common theme in various religions. Our bodies are bio-chemical entities whose equilibriums may be altered by depriving ourselves (abstaining) from certain ingredients and nourishments over a period of time. In this way, we move our bodies from one biological state of equilibrium to another. It is hoped that this process, this journey from one state of bio-chemical equilibrium to another, will induce a certain spiritual lucidity that will augment our innate tendencies towards the good that is inherent within us. As a religious ritual, this practice is referred to in different ways, the most common are fasting and lent. In several religions, fasting is considered an act of worship and is practiced during designated days, supplemented by other rituals, such as special prayers or meditations. Its culmination is typically marked by feast and celebration. As muslims begin the holy month of Ramadan this year, it is worth remembering that, at the end of the day, religions are tools for us to connect with the divine and realize the good that is within us. Religious rituals (e.g. prayer, fasting, pilgrimage) are not goals for their own sake; they are there to help embed a moral and ethical code in a people. For those who consider Him to be our ultimate moral adjudicator, God judges our character and humanity. We do not pray and fast to go to Heaven. We pray and fast to become good, and that is our path to Heaven. Religions came to us with unified sets of rituals and beliefs but we realise our individual states of grace in our own individual ways. Our spiritual needs, the culminations of the predicaments of our human existence, vary for each one of us, like the swings of a pendulum over time. Our spiritual needs dictate how much of religion we consume at the various stages of our lives. Indeed, those same religious rituals and traditions that one may wish not to engage in today could be of great relevance tomorrow. And vice versa. I am reminded of a muslim friend who eats pork and drinks alcohol yet fasts Ramadan and prays regularly. She considers herself to be a good muslim although in the eyes of some she may not be that, or at all. Diversity within a religion does not negate it; it is a sign of strength, not of weakness. The success of a religion does not come from solidifying a conservative core but in strengthening its capacity to embrace the many, especially those in the minority or on the margins. Ramadan is not meant to be a food orgy; a series of dinner parties lasting till dawn, with excess, waste, and lethargy as byproducts, as some in the Muslim World make it out to be. Ramadan is meant to teach humility; a moral and ethical value that is as old as humans have existed. In the The Sovereignty of Good , Iris Murdoch says that humility is a rare virtue and an unfashionable one. “Only rarely does one meet somebody in whom it positively shines, in whom one apprehends with amazement the absence of the anxious avaricious tentacles of the self.” Murdoch says that the humble man is not necessarily a good man but “... perhaps he is the kind of man who is most likely of all to become good.”
Mar 29, 2022 · 3 min read
The Muslim Feast of Sacrifice
Next week marks the days of the muslim Eid al-Adha, the feast of sacrifice, and many will be sacrificing livestock, mainly sheep, as alms to feed the poor. During Muhammad's times, 1500 years ago, one's wealth was measured by few yardsticks, one of which was how much livestock one owned. Back then in the Arabian Peninsula, livestock (camels, horses, sheep, cows, etc.) were a key element of one's wealth and it made sense to measure giving to the poor in terms of how many sheep or camels one donated to feed them. In this day and age, especially in our new COVID 19 world order, and the other diseases that are expected to afflict us with varying degrees of intensity, the less well off and the poor have different needs. It could be paying rent for a humble abode, buying medicine or clothes, paying a utility bill to keep warm and keep the lights on, meet a loan obligation or school tuition, or other essential needs - it is not always food, and if it is food it is certainly not always meat. We need to re-define what makes for an appropriate almsgiving during Eid al-Adha in our day and age. Perhaps it makes sense instead of sacrificing a sheep to donate the price of that sheep into a national fund that would, in turn, give financial support to the poor and the needy as their needs may be. Happy Eid...
Jul 5, 2022 · 2 min read
MENA's Stock Markets – The Game is About to Start
For exchanges and trading venues, liquidity is the name of the game. The L word is what matters; it is the reason why companies seek out certain exchanges to list on, and it is why investors and intermediaries flock to exchanges. A virtuous cycle of sorts is at play. Higher liquidity levels lead to higher valuations of listed securities. This, in turn, attracts more listings, which attract more investors and intermediaries, fueling even higher liquidity levels. A traditionally stratified sector, the exchange world has gone through seismic changes over the past couple of decades. The amalgamation of otherwise discrete liquidity pools across geographic and product boundaries saw the creation of international liquidity streams. Nasdaq Group, Euronext, ICE / NYSE, and the more recent Swiss-Spanish exchange merger are examples of successes. Deutsche Börse’s attempts at expanding its liquidity pool via mergers and acquisitions, and the repeated interests in the London Stock Exchange by several suitors are examples of efforts that did not go far. Liquidity consolidation will continue to be the modus operandi of exchanges for the foreseeable future. This is not only because of the virtuous cycle referred to above but also because revenues generated by exchanges from the sale of information and information-related services are growing by leaps and bounds. For some stock markets, these revenue streams have eclipsed those generated by cash equities trading. And what better source of raw information and data that can be packaged into multiple products and sold to end users than a trading space – the more trading in more financial securities and products across multiple geographies, the more information generated. In many countries, particularly developed economies, stock markets have corporatized, becoming shareholding companies listing their shares on their own, and other platforms. This development has been a major facilitator of liquidity consolidation, realized through exchange mergers, acquisitions, and cross shareholdings. For other countries and stock markets that have not gone through this transformation fully yet, such as those in the MENA region, the question is: what awaits? In other words, given that liquidity consolidation is the current operating business model for stock markets and trading venues worldwide, what future strategies will MENA exchanges pursue to better serve their listed companies, investors, financial service providers and, ultimately their economies? To answer this question, one is tempted to first view the capital market landscape in the MENA region. Although geographically contiguous, when it comes to the level of capital market development, MENA can be viewed as a collection of sub-regions. The Gulf Cooperation Council (GCC) countries and Egypt are the more advanced. In the Levant, Jordan and Palestine stand out. In North Africa, Morocco is ahead. Hence, one may assume that these varying levels of capital market development translate into multiple strategies to be pursued by the region’s exchanges. But that is not the case. The current operating business model of exchanges worldwide means that each MENA stock market will have to choose one of two strategies: Node or Niche. Node or Niche will be the only choices for many exchanges in frontier and emerging markets, including those in MENA. As worldwide liquidity continues to gravitate towards fewer global streams, an exchange operating in a developing country will have to choose. It can function as a liquidity node, aggregating liquidity within its region and connecting the resultant regional liquidity pool to international liquidity streams, benefiting listed companies, investors and intermediaries. Or, it can specialize in terms of services and product offerings – the niche approach. The decision of individual MENA exchanges to go for either a Node or Niche strategy will be influenced by multiple factors. One of those factors is the presence of international exchanges in the region. Three global exchanges are currently present in MENA in different ways. The London Stock Exchange has a strategic relationship with Morocco. Dubai owns a substantial minority position in Nasdaq Group. And several countries are using Euronext’s trading system, as well as Nasdaq’s. These relationships are bound to inform, with varying degrees of intensity, future strategies of MENA stock markets. A key question is whether ties to the big boys will connect the region’s liquidity pools to international liquidity streams – the liquidity node strategy. The need for MENA companies to list on liquid exchanges is another factor influencing strategies of local exchanges. MENA companies are moving from being successful local operations to becoming regionally competitive enterprises with, at times substantial tranches of international activities as part of their portfolios. In doing so, they have gained added appreciation of the role that equity plays in their capital structures. Investors and shareholders are also realizing that for the Middle East to evolve into an internationally competitive region with successful industry clusters, companies in the region need to expand their equity bases. Raising seed and venture capital, seeking private equity injections for turnaround and growth, and going public and listing on liquid exchanges are becoming common practices in a region that has traditionally relied on debt. Some exchanges in MENA may choose a Node Strategy, specializing in certain products and services. Nasdaq Dubai has established itself as the listing venue of choice for Islamic sukuks. Abu Dhabi has been actively seeking to lead the listing and trading of exchange traded funds (ETFs) in the region. Casablanca may function as a platform to access certain African capital markets. Given that Jordan has one of the largest reserves of phosphate in the world, the Amman Stock Exchange has a golden opportunity to launch an internationally traded phosphate contract in partnership with an international commodities or derivatives exchange. As MENA exchanges come of age, they will look for new and better ways to serve stakeholders. Cross border investing is foreshadowing the creation of regional heroes in multiple sectors. The compression of dispersed regional economic interests into single corporate entities with regional and international mandates and aspirations is putting pressure on MENA exchanges to respond. Instead of a race to the bottom, MENA stock markets will soon start on a different kind of competition to gather regional liquidity, and listings. The international alliances and liquidity linkages that MENA exchanges will develop will provide another way in which the region is becoming inexorably linked to the rest of the world; something that is of immense benefit to companies, investors and intermediaries, and an exciting development that will usher in new opportunities and challenges.
Mar 22, 2022 · 6 min read
The Middle East - Current State of Play
For investors and businesses, doing business and investing in frontier and emerging markets is all about assessing risk, and pricing it. In some ways, risk is in the eye of the beholder, and risk premia differ depending on who is doing the pricing. But to be able to price risk, one first needs to understand the underlying risk dynamics – deconstructing event clusters and filtering out noise in the process. What we are left with, we hope, is a bare-bones take on an otherwise complicated reality. The Middle East is rich in resources and human capital. And for those investors and businesses who are able to work with and in this region as it moves to realize its potential, rich returns will be realized. Fashioning an appropriate risk management and mitigation strategy is a prerequisite to such success. Risk can be viewed through more than one prism. Today’s Middle East exhibits elements of risk related to politics, economics, religion, language, development policies, culture, and history. Lack of democratic practices and traditions; a major monotheistic religion going through reformation; a language that refers more to itself than to reality; poverty, unemployment, economic inequality and a lack of an economic level playing field; the legacy of colonialism; a culture that suppresses and oppresses; and development policies that push agrarian communities into the information age bypassing an industrial prerequisite – add all of the above conditions and drivers together, in one region, at the same time, and we begin to understand the confluence of dynamics that is gripping the Middle East today and will continue to do so for the foreseeable future. The Arab Spring heralded a new era for the region and the genie that is out of the bottle is that of reform: political, economic, religious, cultural, and linguistic reform. And if world history is to provide any clues as to what will happen next in this region, the first couple of decades of reform will indeed not be easy. Competing schools of thought will drive reform movements, as different economic models and political formulae get tested and retested, as cultural givens are challenged, as Islam undergoes reformation, and as Arabs begin to struggle with their language in an attempt to have it serve their needs rather than assume a life of its own. Perhaps no other recent statement of principles is more relevant to the Middle East today than President Obama’s interview with the Atlantic Magazine a few years ago. Reading the interview, one comes away with several conclusions, chief among them are that advances in energy technologies have lessened the dependence of world economies on Arab oil (although the tragic war in Ukraine may have temporarily impeded this trend); that democracy cannot be exported to or parachuted into the region – it has to be homemade; and that large-scale military interventions in the Middle East are no longer something the US will consider. The downgrading of Islamic terrorism as a national security threat by the Biden Administration as it focuses on Russia, China, and home-grown nationalist terrorism is another reason the Middle East is no longer the priority it used to be. The Obama interview was not the parting words of a departing President; these principles shall come to define US and Western attitudes and policies in the Middle East for decades to come. President Trump may have tried to alter tactics but did not move far from this strategy. When people are ready for change, they tend to grab the nearest ideology and run with it. It is not ideology that causes change; it is people who utilize and use (sometimes abuse) ideology to catalyze and realize change. Since the collapse of the Ottoman Empire and the ensuing years of colonialism and Cold War, peoples of the Middle East tried to realize progress by utilizing different imported “ism-s”. Nationalism, socialism, and capitalism were used and abused and as a result are mostly discredited today by the region’s populations. The only ideology that has not been fully tested yet as a tool for change and progress in the Middle East is one based on religion. The rise of Political Islam is inevitable, given the lack of legitimacy that other ideologies have suffered in the Middle East. And the current intellectual void. But what kind or, more accurately, kinds of Political Islam? Will Islam-based political movements be militant or peaceful? Will reform, liberal, and conservative Islamic schools of thought be able to co-exist on one terrain? Will Middle East Muslim-based political movements secularize over time – like the Christian Democrats did in Europe, for example? The struggles within this major monotheistic faith will impact the world for decades to come. In his interview with the Atlantic Monthly, President Obama pointed out the need to rebalance US engagement with the rest of the world by tilting towards Asia, given China’s global ascent and rising aspirations. China has a sizeable Muslim population, centered mainly in the northwest part of the country; an area that is less developed and which has traditionally supplied a significant number of soldiers in the Chinese army. Which ideology will China’s Muslims grab and run with as they seek change and progress? Will it be that of the Chinese Communist Party, where decades of economic reform resulted in a political core in search of new meaning and philosophy? Or will it be one version or another of Political Islam at a time when this religion is in the throes of reformation? In this geopolitical context, and others throughout the world where religion could play a big role in conflict escalation and where weapons of mass destruction could end up in the wrong hands, it may not be the flutter of a butterfly’s wing but the flapping of an Arab cloak that will cause a typhoon halfway around the world. Islam’s presence in Asia, Southeast Asia, North America and Europe means that as this religion undergoes reformation and as the reformation process impacts and is impacted by political, economic, cultural and linguistic dynamics in the Middle East, Western engagement in this region will continue to be paramount to the individual and collective national security interests of Western powers. The language of President Obama’s interview with the Atlantic Magazine indicates that as the US reconfigures its mode of engagement with the Middle East, it will pursue the most effective approaches with the least possible cost structures. President Trump was hard pressed to alter this orientation. The Biden Administration will continue and amplify on this strategy. Language is important and perhaps nowhere more so than in Arab lands, given the history and culture of the place. Canvassing commentaries in the Middle East at the time, it is interesting to note how the words of the Obama interview were interpreted and understood. President Obama’s emphasis on the need for the peoples of the region themselves to undertake the needed reforms was viewed by some as an act of abandonment. His mention of the concept of tribalism as a dynamic inhibiting progress was understood to mean tribalism in its narrow sense – the extended family and the main social unit in many Arab societies; not tribalism as a state of mind – an allegiance to ideas and modes of behavior that impede progress. It was the writings of Wittgenstein that underscored the importance of language and its relationship to development and reform by posing the question of whether language refers to itself or to reality. Languages go through cycles; at times referring more to themselves than to reality; at others, they refer more to reality than to themselves. Reform efforts are usually aided and augmented when a language refers more to reality than to itself. The ability to transcend the religious metaphor, a key element in any religious reformation, cannot be easily realized if the language within which that religion is based is referring more to itself than to reality – as Arabic language is today. This was not always the case – when Arabic referred more to reality than to itself it powered the civilizational ascendancy of Arabs and Muslims. As these dynamics unfold over the coming decades, those with vested interests in the Middle East should pay close attention to the reformers – individuals who are fashioning and providing the intellectual underpinnings for new change ideologies, challenging violence and subjugation in the Arab and Muslim worlds. During Europe’s Dark Ages, it was the Muslim Civilization that housed and nurtured the works and intellectual achievements of Western thinkers, providing a vital link between Europe’s neglected past and its future enlightenment. Now, Western Civilization needs to undertake a similar effort – not just for the sake of enlightenment but also for the sake of world peace. In 1882, Nietzsche wrote “I greet all the signs that a more manly, warlike age is coming, which will, above all, bring valour again into honour! For it has to prepare the way for a yet higher age, and assemble the force which that age will one day have need of – that age which will carry heroism into knowledge and wage war for the sake of ideas and their consequences. To that end many brave pioneers are needed now…”. It is a good description of what is happening in the Middle East today. We need to find those brave pioneers and provide them with enabling environments. And that is a big part of what we all can do.
Apr 5, 2022 · 8 min read