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
An 18 Month Action Plan to Boost the Amman Stock Exchange
For listed companies, intermediaries, and investors to view the Amman Stock Exchange as an anachronism these days - well, they can hardly be blamed. The ASE ranked 6 out of the top 10 best performing stock markets in the world in 2001 and again 8 out of the top 10 best performing in 2008 – please see table below. The ASE used to trade around $ 120 million a day compared to today's average daily of around $ 8 million. The Jordanian exchange lost its emerging market status in late 2008 which caused a large amount of international passive funds to leave, most of which have not returned. The progression of its index since then (below) is indicative. Developments in stock markets worldwide enable Jordanian companies to list on exchanges outside Jordan, in their pursuit of growth capital and higher liquidity for their listed shares - which translates into higher valuations. The ASE did not have any new listings since 2009. A disclosure shy culture continues to dominate and corporate governance best practices still have some ways to go. Equity research on listed companies is in short supply. Advances in technology have enabled Jordanian investors to trade regional and international markets, taking liquidity away from the ASE. The ASE has not undertaken any investor roadshows for years. So, is the Amman Stock Exchange a dud ? Au contraire, mon frère. It is not that every country should have a stock market - that business model is no longer valid. The ASE has important roles to play, locally and in the region. The Amman Stock Exchange's importance emanates from Jordan's regional role - an anchor of stability in an increasingly turbulent part of the world. Having a strong capital market with a vibrant stock exchange at its core is part and parcel of Jordan's armor, which serves both regional and international interests. SME access to finance is fast becoming a critical issue for Jordan. SMEs account for more than half of GDP and a similarly large percentage of job creation. With official unemployment figures in the 20s%, and youth unemployment nearing 50%, the ASE has an important role to play in supporting the country's SMEs - by enabling them to list securities to raise growth capital; and to be there as an exit option, facilitating venture capital and private equity investments into Jordanian SMEs. Jordan's infrastructure needs are multiplying and the country's debt and budget deficit levels are limiting the ability of successive governments to deploy public funds in infrastructure development. Setting up a Jordan Infrastructure Development Fund and listing it on the ASE, open to local, regional, and international investors, would go a long way in helping meet infrastructure capital needs. Such a Fund would also allow Jordanian citizens to have a vested interest in the economic development of their country, thus supporting democratic processes and decreasing a sense of economic alienation that some feel. Listed companies on the Amman Stock Exchange present good investment opportunities. Some sectors are ripe for consolidation - such as banking and insurance. Jordan is endowed with some of the world's largest reserves of phosphate and potash. The Free Trade Agreement with the United States opened up a vast market for Jordanian manufacturers. If the closing days of 2008 marked an end of an era for the ASE, 2023 can certainly mark the beginning of a new one – but how to go about this? Investor protection and liquidity are the two pillars upon which successful capital markets rest. Investor protection is typically the responsibility of the securities commission (the regulator) while liquidity is the raison d'être of a stock market. The Jordan Securities Commission (JSC) is the regulator and flag carrier of Jordan’s capital market. The Amman Stock Exchange (ASE) is the market where wealth is stored, growth capital is raised, and financial assets are bought and sold. The Securities Depository Center (SDC) is where securities ownership is documented and transferred and where clearing and settlement between brokerage firms take place – important risk management functions. What follows is a series of recommended short, medium, and long-term actions that could be fashioned over an 18-month period to be undertaken by both the JSC and the ASE, with support from the Government of Jordan. The aim is to further develop Jordan’s capital market by making it, to borrow the words of Mark Mobius, more Fair, Efficient, Liquid, and Transparent – FELT. Recommended Actions: 1) Strict enforcement of disclosure and corporate governance requirements for ASE listed companies with a new emphasis on ESG, gender, and climate best practices. 2) Procure and utilize a world class trade surveillance system to monitor trading violations and ensure investor confidence. 3) Review the Securities Law, bylaws, and regulations and iron out inconsistencies and parts not in accordance with international best practices - including Jordan’s Sukuk Law. 4) Catalyze the emergence of Exchange Traded Funds (ETF) – capitalize on the launch of the ASE 20 index and incentivize commercial banks to offer this product to clients. 5) Set up a Jordan Chapter for the Middle East Investor Relations Association (MEIRA) so that listed companies upgrade communications skills needed to communicate with investors. 6) Organize International Investor Roadshows to investment hubs like London, New York City, and the GCC - go to where the investors are and present the equity growth stories of ASE listed companies. 7) Launch a local investor education program to make retail investors partners in developing the capital market. 8) Facilitate the publication of equity research reports on ASE listed companies so that investor decisions are less based on sentiment and word of mouth. 9) Incentivize family companies, private shareholding companies, and government owned enterprises to list on the ASE - explain the benefits of listing and provide corporate income tax incentives for a limited time to encourage companies to list. 10) Set up a Sharia compliant investment window at the ASE. 11) Introduce market makers - set up a light framework for market makers appropriate to a screen-based trading environment to increase liquidity of listed shares and allow for more market depth (less price fluctuations). 12) Remote access regional and international brokers - allow select brokers from outside Jordan to remote access the ASE via sponsorship arrangements with Jordanian brokers. 13) Catalyze the emergence of a professional class of asset managers – encourage the Social Security Investment Fund to request proposals (RFP) and award four asset management contracts, each JD 5 million, to select asset managers to invest the funds in ASE listed companies and regional exchanges, with performance measured against benchmarks. 14) Facilitate the issuance, listing, and trading of corporate bonds and municipal bonds – provide issuers with tax incentives. 15) Encourage ASE listed companies to issue global depository receipts to be listed on international exchanges to raise capital and attract international investors. 16) Regain Jordan’s MSCI Emerging Markets Status to attract international portfolio investments. 17) Set up an SME and Entrepreneurs Stock Market segment – establish a strategic partnership with a regional or an international exchange to obtain the business model, technology, and brand to launch this specialized market segment to facilitate SME and entrepreneurs’ access to finance and growth capital. The Aqaba Special Economic Zone would be an ideal location for this specialized market, helping turn Aqaba into a vibrant regional financial hub. 18) Establish a Jordan Infrastructure Development Fund and list it on the ASE to address Jordan’s infrastructure finance needs and create investment opportunities for Jordanian citizens in support of Public Private Partnerships. 19) List ASE shares on its own platform, opening the door for Jordanians to own shares in their national exchange, and work to attract a regional or international stock market as a strategic partner for the ASE. Of late, Jordan’s capital market has been underutilized by Jordanian companies and the Government when it comes to raising funds. By undertaking needed actions, the ASE will be able to function as an effective node, connecting Jordan’s fund seekers to local, regional, and international fund providers, serving the interests of citizens, corporates and public entities. The author is a Board Member of the Amman Stock Exchange representing the Government Investments Management Company, owner of the Exchange.
Oct 23, 2022 · 7 min read
Transparency in the Middle East
Last week, The World Bank published a report entitled “A New State of Mind: Greater Transparency and Accountability in the Middle East and North Africa.” A main premise of the report, the link for which is at the end of this article, is that “poor governance, and, in particular, the lack of government transparency and accountability, is at the root of the region’s development failings—including low growth, exclusion of the most disadvantaged and women, and overuse of such precious natural resources as land and water.” When put in a legal context, “transparency” becomes “disclosure.” And, depending on which context disclosure is being applied in, we get different manifestations of it. For public shareholding companies listed on stock markets, there are rules and regulations that require accurate, timely, and complete disclosures. Nowadays, capital markets cannot function and thrive without this. External auditors play a critical role in safeguarding proper disclosure of listed companies. To paraphrase Captain Ramsey in the movie Crimson Tide, external auditors constitute the front line and the last line of defense as far as investors and shareholders are concerned. How external auditors are licensed, accredited, and monitored is critical to safeguarding shareholder interests and maintaining investor confidence, particularly in markets where legal recourse is not readily available - which is the case in many Middle East and North Africa markets. Listed companies typically engage in two types of legally required disclosures: routine regular disclosures, such as those pertaining to quarterly, semi-annual and annual results; and, immediate disclosures of information related to events that may have a material impact on the share price, such as a fire in a production facility or the gain or loss of a major contract to sell products, or an acquisition. An area that receives little attention in the Middle East and North Africa markets is related to “related party transactions.” A listed company may have legitimate reasons to, say, purchase goods and services from another company that happens to be related to a board member, a major shareholder, or a member of its senior management. However, such transactions need to be conducted on an “arm’s length” basis, making sure of the quality of goods purchased and that the price paid is a fair market price, without unfair markups. A related party transaction should also be disclosed to the market, along with the rationale for entering into it. Several international organizations, including the OECD, have issued recommended best practices that can be followed in such circumstances. An acquisition of a related company by a listed company at a price that includes a high markup of goodwill needs also to be fully explained and disclosed to shareholders. Monitoring proper disclosure by listed companies is the responsibility of the capital market regulator. The capital market regulator has three main functions: enforcement of the securities law and related regulations; market reform - updating existing rules and addressing market deformities; and, market development - introducing new financial products, for example. The ability of the capital market regulator to enforce disclosure is paramount. Otherwise, investor confidence in listed companies will be lost, leading to dwindling liquidity and a migration away by investors and companies from the afflicted stock market to greener pastures. The days of investor and company “capture” by national exchanges are gone. This “ability” of the regulator has two main aspects to it: top notch knowhow of the intricacies of capital markets, and freedom from political interference. The ability of the capital market regulator to recruit, retain, and remunerate qualified talent is critical. Political freedom for the regulator means financial independence, with its allocations enshrined in successive government budgets, and a reporting line to the highest political authority in the land - not to cabinet minister, for example. The regulator cannot take part of the trading or depository fees that accrue to exchanges and depositories to finance its operations - a clear regulatory conflict of interest that will lead to a loss of investor confidence. It may seem, at first sight, a forgone conclusion that taking care of one’s capital market is good for on’e economy. After all, the national capital market, with the stock market at its core, plays an important role in facilitating access to finance for small, medium, and large enterprises and corporations, which use funds raised to undertake capital investments that lead to economic growth and create jobs - much relevant points for the fast growing populations of the Middle East and North Africa region. But that is now always the case. And, as The World Bank report implies, the ability of the capital market regulator in some countries of this region to enforce proper disclosure rules and regulations requires a shift in the enforcement matrix. And in such circumstances, the “state” has to provide the political cover and support to the entities undertaking enforcement actions. https://openknowledge.worldbank.org/handle/10986/38065
Oct 10, 2022 · 4 min read
Islamic Finance in Jordan
Many years ago I was an undergraduate student at the back then only university in the UAE - the United Arab Emirates University in Al Ain. For those who remember Al Ain in the early 1980s, it was an oasis in more ways than one. Two hours inland by car from both Abu Dhabi and Dubai, Al Ain’s greenery and water fountains, its cool breezes, and friendly social life gave living there a special flavor. Back then we did not have internet or streaming services, or satellite TV for that matter. My windows to the world were two publications in print form: the Atlantic Monthly magazine, and a great daily newspaper called the International Herald Tribune. Both reached me in Al Ain by regular mail several days, or weeks, late. The print edition of the Tribune was an amalgamation of articles from the New York Times, the LA Times and other media. It was principally sold outside the United States - in Europe, the Middle East and other geographies. It spoke to a global, English speaking audience and covered politics, economics, finance and had a cultural section detailing latest theater and opera productions, art exhibits by international city, as well as book reviews. It was in the Tribune back then that I read an interview with a western banker working in the Gulf explaining Islamic finance to western readers. The banker, whose name I no longer recall, said that Islam treated money as a medium of exchange and not as a commodity. A medium of exchange can be used to exchange goods and services and benefits (profits) can be had from such exchanges. But, not being a commodity, Islam does not allow for the buying and selling of money for a price (i.e. interest). And that is the key philosophical underpinning of Islamic finance. Globally, Islamic finance started in the 1960s in Pakistan and Egypt, with special banks focused on the agriculture sector giving farmers interest free loans. The Jeddah Conference in 1975 was a milestone and an event that put in place Islamic finance rules and regulations. The establishment of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFO) in 2000 in Bahrain is another major milestone in the development of Islamic finance worldwide. The emergence of Islamic banks, non-bank Islamic finance institutions, and Islamic trusts followed with the setting up of the Dubai Islamic Bank in 1976, Faisal Bank (Saudi and Egypt) in 1977, and the Islamic Bank of Sudan in 1977. In Jordan, the Jordan Islamic Bank was established in 1978 under a temporary law. The Banking Law for the year 2000 had articles (50 to 58) that regulated Islamic banks in the Kingdom, with four Islamic banks currently in operation: Islamic International Arab Bank, Safwa Bank, Jordan Islamic Bank, and Al Rajhi Bank. Additionally, 17 non-bank Islamic finance institutions and 3 Islamic insurance companies offer their services to clients under the supervision of the Central Bank of Jordan. Two main products are used by Islamic banks in Jordan: Murabaha and Ijara. In a Murabaha contract, the bank buys an asset or a commodity and resells it to the client at pre-agreed upon price and time period. The asset or commodity ownership transfers to the client immediately upon sale. In an Ijara (lease) contract, the bank buys an asset or a commodity, leases it to the client, and the client makes monthly payments to the bank over an agreed upon period of time. The ownership of the asset or commodity transfers to the client after the final lease payment. As to sukuks, the legal and regulatory framework in Jordan has been in place since 2014. Sukuks are financial instruments (contracts) between Islamic fund providers and fund users, with three main contracts in use in Jordan: Murabaha and Ijara, as well as Istisna’ (build/construct/manufacture an asset and sell it to a client over time by installments). For funding from Islamic banks in Jordan: As to funding via sukuks in Jordan: The process of obtaining funding from Islamic banks in Jordan starts out with an application submitted by the client, followed by a credit analysis and a cashflow analysis conducted by the bank. Guarantees are also required. These can be Government of Jordan or other third party guarantees, land or real estate, the project or the asset to be financed, or ring fenced cashflows of the project or its owner. For sukuks, a feasibility study is required, coupled with a risk assessment, a prospectus, as well as guarantees. A salient feature of a sukuk issue in Jordan is the Special Purpose Vehicle (SPV) structure. A Special Bylaw regulates the establishment and management of Sukuk SPVs, which are private shareholding companies established with the purpose of separating the financial accounts of the sukuks from those of the issuers of the sukuks. As such, the SPV is an intermediary between the issuer of the sukuks and the investor (sukuk holder). The SPV acts as an agent on behalf of the sukuk holder to collect payments from the issuer (both interim and final payments). The SPV also manages the extinguishing of the sukuks at maturity. The SPV Currently, there is a total of JD 584 million of sukuks outstanding in Jordan, all issued by the Government of Jordan and related entities. These are: Market estimates indicate that the four Islamic banks in Jordan have around JD 2.45 billion in dry powder, with an additional JD 220 million at the 17 non-bank financial institutions, all looking for funding and investment opportunities.
Aug 23, 2022 · 7 min read
The US and Jordan
“The Asia Scotland Institute is delighted to be joined by Bruce Riedel, of Brookings, and Majd Shafiq to discuss his latest book, 'Jordan and America: An Enduring Friendship. This is the first book to tell the remarkable story of the relationship between Jordan and the United States and how their leaders have navigated the dangerous waters of the most volatile region in the world. Jordan has been an important ally of the United States for more than seventy years, thanks largely to two members of the Hashemite family: King Hussein, who came to power at the age of 17 in 1952 and governed for nearly a half-century, and his son, King Abdullah, who inherited the throne in 1999. Both survived numerous assassination attempts, wars, and plots by their many enemies in the region. Both ruled with a firm hand but without engaging in the dictatorial extremes so common to the region. American presidents from Eisenhower to Biden have worked closely with the two Hashemite kings to maintain peace and stability in the region--when possible. The relationship often has been rocky, punctuated by numerous crises, but in the end, it has endured and thrived. Long-time Middle East expert Bruce Riedel tells the story of the U.S.-Jordanian relationship with his characteristic insight, flair, and eye for telling details. For anyone interested in the region, understanding this story will provide new insights into the Arab-Israeli conflict, the multiple Persian Gulf wars, and the endless quest to bring long-term peace and stability to the region.” https://www.youtube.com/watch?v=u4RAkVYqgMM
Sep 13, 2022 · 2 min read