Falling flat

Arab capital markets struggle for relevance

Attempting to put together a commentary on the state of the Arab capital markets has become increasingly difficult for fear of being too biased, or worse, too skeptical. But as the parades of often-eloquent speakers continue to elaborate on the development of stock and credit markets in the Arab world, it is safe to say that yes, there is the proverbial “money to be made” in some Arab markets. But the question remains, are they heading in the right direction as far as growing the investor base and attracting fresh capital? The debate rages on, but recent events suggest that the notion of liquid and integrated markets is almost as far off as good governance and openness. Some recent bubbles came through newly privatized sectors, or even a real estate development here and there. But in essence, and despite some heart stopping cycles, the markets remained illiquid, and public participation weak. The main worries as they relate to the dynamics of the Arab market include, slow dealings, a somewhat opaque information and data system and the fragile economic and social structures – which the markets ought to reflect over time. These are linked to economic size and macro issues, as well as regulatory inexperience and lack of transparency and standard corporate governance. We could be cheeky and pull out a report from the UNDP on human development in the Arab countries – or a more recent obvious yet chilling diatribe on the poor state of governance in the area – to build the case that Arab capital markets are destined to remain disparate, shallow, speculative arenas, unlikely to take a path of growth and global relevance. It is unthinkable that the capital markets can develop meaningfully before there is a trajectory of openness, sensible economic planning, transparency and people empowerment. It is not a political angle it is the only angle. If we are to have capital markets that act as a faucet of growth and development of the Arab generations to come, it would be useful to link it, inextricably to political reform and a process of de-corrupting the political systems – a tall order for sure. Can we have open and deep markets for paper assets if trust in the economic, social and political future is not partly secured? Can we attract capital and develop the right environment for savings to be directed at the markets if, for the most part, we have no plan for tackling unemployment besides rhetoric and flamboyant use of “emergency” and “security” as a means of stratifying the status quo? There is ample room for Arab capital markets to exist and prosper. But without the corollaries of human development, economic depth and a prosperous and trusting population, all efforts to perpetuate the dream of capital markets are as doomed as a Road Map, which does not take into account the map itself.

Nothing would be better than for Arab markets to truly enter the realm of “emerging markets” and get more visibility and respect. But realistically, without seismic changes in political governance, and policies that promote prosperity over policing, it’s a non-starter. It is a good sign that the professionals in the Arab area do hold conferences – the exchange of ideas is refreshing and does help the local hotel industry when the show comes to Beirut. However, better usage of resources would be for those sharp pros to exert pressure for change.

In this era of Texan “crusades,” the Arab capital markets will most likely be restrained on one hand by weak economies suffering structural problems and political neglect, and on the other by the stark reality of decaying political and social systems. Totalitarian regimes and equity and business cultures rarely coexist. They are stuck between local economic despair and shrinking relevance of their impact and role in the more global world. There is sincere denial from many places in the Arab world about many things, but what is striking is how many players in the region still expect to have a financial center in the region. At the latest count, two Gulf cities are sort of competing for the role of financial center. Chances are, most of the financial centers in the world have already been established. This is independent of the fact that entire daily turnover of stocks and bonds in the region is probably less than that of Intel, L’Oreal, or Nokia in a few hours.

The recent launch of CNBC Arabic seems astounding. Here is a region with little free press, harsh living conditions, autocratic “family business” type regimes, often with spectacularly high unemployment levels, and rampant corruption, and now it has its own financial news channel? Not surprising though, given that CNBC in its short life has become a sort of ATM of hyper-capitalist propaganda. It is short sighted to think that because CNBC Arabic has been launched, something good must be happening in Arab capital markets. It seems optimistic to think that 24/7 Arab financial news is needed or even justified. The clear focus for Arab capital markets in the coming year will be events outside the realm of economics and finance. In a period where the existence of some if not all current systems is on the table, and where human suffering is excruciating, where illiteracy is still an issue, and justice and representation are not the currency of choice, the Arab capital markets will remain in a rut. Developing an equity culture so crucial for markets to take form takes generations and, most importantly, requires prosperous and vibrant youthful enterprise. But to draw skill and money to the regional markets will require that the inevitable reassessment result in the triumph of the economic/human development priority. Not a sure bet, but hope springs eternal.