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.