Stock exchanges in the Gulf Cooperation Council are still relatively young and have not reached the degree of sophistication of their Western peers. To discuss what GCC exchanges can do to evolve and what mistakes should be avoided, Executive sat down for a chat with Eric Bertrand, Principal Exchange Business Strategy Consultant for NYSE Euronext.
What do you think are key barriers for an integration of the GCC exchanges? Are you pessimistic regarding the possibility of such integration?
I am not overly optimistic about the possibility of integration of GCC exchanges. The main barrier is probably political willingness. Technology is not a barrier and from a business point of view, there is no reason why it should not happen. The only reason why it is not happening is because there is a lack of focus on it; the need for it is not felt, which is strange as it seems to happen everywhere else in the world and it should happen in this region.
The region has six different, small countries and seven different bourses. This situation would be considered unsustainable anywhere else in the world. Investors around the world really consider the GCC and are interested in the region but I don’t think they are interested in any individual country; they are interested in the region as a whole. So if there were an institutional construction such as a regional cooperation that would bring to life one GCC exchange, it would certainly be extremely successful and probably more successful than the seven little exchanges working independently.
What is certain is that when international investors look at the world, they look more at regions than at independent countries, especially when it comes to really small countries. A lot of international investors understand that people do business in different ways and they know that the GCC exchanges are not too risky in terms of systematic risk due to Sharia law banning derivatives trading and short selling. They are concerned about the lack of diversification of the GCC economies, the lack of liquidity among the exchanges and the limited number of listed companies.
What should the top three priorities be for exchanges and regulators?
The first priority should be an integration of exchanges and the development of a regional exchange. The second priority should be for the exchange to be more diversified in terms of sector representation and better reflect the economy. GCC exchanges are overpowered by the banking sector and then by the telecommunications sector. The tourism sector is not reflected on the exchanges whereas tourism is starting to strive in the region. Most airlines are state-owned although they are very successful and known worldwide; petrochemicals are generally not listed and state-owned; there are no big manufacturers listed on the exchanges. The third priority would be to align practices with international standards. Some of the mistakes the developed world made should not be replicated. Do not ‘copy and paste’ [the Western model] as that would be a nightmare.
What mistakes should the GCC exchanges avoid?
Our CEO Dominique Cerruti, [has] mentioned… fragmentation of exchanges and the increasing opacity of markets — two consequences that result from a general belief in the benefit of overall competition. It is very unlikely for this to be replicated here, as the GCC does not have the size; the economies are small so they are naturally protected against these trends.
The economies are… protected by the Arab culture and religion, which does not see speculation [in a good light] and generally forbids the use of derivatives. Financial innovation is much more limited, and “toxic” products such as CDOs [collateralized debt obligations] are unlikely to happen here.
All emerging countries, including Arab countries, are looking to the Western world as a model because its development is older. The risk is that countries from the GCC see everything the West did as good, which it obviously [was] not. The evolution [of Western exchanges] was the product of our own evolution, culture and business practices and it is very hard to take something born under one framework and copy it onto another framework. There is one thing which I think is a basic reason why exchanges here are less developed than they are in the West, and that is because the business culture here is based on doing business with people you know, you lend money to someone you know, [and] if you need financing, you ask family or friends or your banker whom you’ve known for 20 years.
The exchange itself is a venue for anonymity so it is very different from the way Arabs do business. They like doing business with people they know and the exchange is a way of doing business with people that you will never know. So if you go back to these basic elements, it is not that easy to copy and paste something designed with a Western mindset into the mindset here.
In all Arab countries, most of the financing of projects is done by banks because it is done in a much more personal manner. In the West, we used to work this way, then in the 1970s and 1980s, we developed much more [complex] financial markets, where you can get financing from anonymous sources by using bonds, raise capital by issuing stocks and so on. It became a totally different way of thinking about doing business.
What are your thoughts on the benefits of a merger between the Dubai Financial Market and the Abu Dhabi Securities Exchange?
A merger could only probably improve things in terms of volumes. It doesn’t make sense to have two exchanges in one small country. Look at Europe for instance. It is still made up of small countries such as France with a population of 60 million and Germany 80 million, which are much bigger than the GCC countries, and they still feel the need to merge their exchanges to bring out bigger liquidity pools and a bigger list of stocks in order to have a global exposure to international investors. The economies in these European countries are among the largest in the world and they still feel the need to merge. Here we have very small counties with very small exchanges and they multiply. This doesn’t fit the big picture.