Crises purify markets,” pronounced Fadi Khalaf, the recently appointed secretary general of the Union of Arab Stock Exchanges (UASE) in his opening remarks to the organization’s first public meeting in Cairo in early December. With stock market heads trying to bolster each other’s confidence that the worst was over, the global economic crisis had never sounded more silver-lined.
Eleven days after Dubai World, the government-owned holding company, delayed its debt repayments in November and caused a massive drop in stock prices around the globe, Rashed al-Baloushi, deputy executive officer at the Abu Dhabi Securities Exchange said the bourse was “very optimistic about the future of [its] [Emirati] markets.”
Despite such statements intended to minimize the impact of the Dubai World crisis, the fact that most Arab governments retain majority shares in their markets remains a critical factor in these economies’ ability to mitigate future crises.
The near default of Nakheel — the main real estate development arm of Dubai World — whose The World and Palm Island developments now symbolize the emirate’s excess, aroused much debate at the conference, as did speculations that Abu Dhabi might or might not take responsibility for bailing out its ostentatious neighbor.
Abu Dhabi announced in mid-December that it would lend Dubai $10 billion to cover part of the debt, essentially paying in full the matured Islamic bond and stabilizing Dubai as a whole.
Despite the lack of clarity on what would constitute the largest government default since Argentina had to undergo debt restructuring in 2001, the delegates’ mood remained aggressively confident. Reassurances abounded that markets had recovered from the Dubai scare and no lasting repercussions were expected.
“The first reaction was an overreaction,” declared Andre Went, the chief executive officer of the Qatar Stock Exchange (QSE).
What do Middle Eastern markets need?
In his opening remarks, the UASE’s Khalaf floated objectives for the delegates to pursue. Possibilities included a financial supervisory body for the Arab states and the establishment of a pan-Arab clearinghouse. Subsequent panels addressed the impact of the global crisis on Arab markets, market projections for 2010, greater integration and tougher regulation.
As Arab markets grow more complex and offer more diversified products, from derivatives to futures, off-market trading has risen in profile. The Secretary General of the World Federation of Exchanges, Thomas Krantz, cautioned against the increasing number of over-the-counter transactions that are conducted outside the regulation of a market or clearing house. Such non-exchange trading, he warned, would dry up liquidity that Arab markets desperately need to assuage fluctuations and, in addition, destroy price transparency set by an open market.
Turn the spinning wheel faster
Similar to the affiliation established between the Dubai Exchange and NASDAQ in 2005, Went announced a partnership between the QSE and NYSE Euronext. He recommended other Arab markets to focus on international alliances in order to “get the spinning wheel turning faster” — in other words, increase market velocity and diversify the range of products available, add central counterparty settlement netting, and lower barriers to membership in order to attract more initial public offerings, described by Ahmed Aweidah, CEO of the Palestine Securities Exchange, as “the lifeblood of exchanges.”
Massimo Capuano, the deputy chief executive of the London Stock Exchange Group and the CEO of the Borsa Italiana, offered a somber note, warning that the deeper impacts of the credit crunch may not yet have been fully felt.
“The World Bank and Arab governments must decrease the impact of a shrinking fiscal space on individuals, and close the feedback loop between real economies and financial systems,” he said. “They must develop internal markets that are able to absorb the effects of external factors. This was a crisis of the banking sector, not the financial sector as a whole.”
He reminded the audience that the crisis came within a context of an Eastward economic power shift, and that responses to the crisis should reflect awareness that Western economic centers are in decline.
Technological integration
Problems preventing the evolution and growth of Arab markets largely boil down to a justifiable lack of confidence in the security of investments. Short of imposing widespread and potentially market distorting regulations, a standardized technological system that allows regional integration and inter-border trading would permit markets to grow and stabilize.
The Chairman of Misr for Clearing, Settlement and Central Depository, Mohammed Abdel Salam, criticized Arab markets and clearinghouses for their many weaknesses, such as late delivery of payments and securities, a lack of transparency and a scarcity of information.
He recommended the adoption of standardized practices across Arab markets, such as immediate suspension of trading for defaulting brokers, enforcement of the 2007 G30 reforms and reinforcement of registered ownership. He urged the assimilation of all Arab markets onto one shared software hub, similar to the eight central securities depositories in Europe and Turkey now connected on the Link Up Markets.
Abdel Salam advocated that Arab markets “link technically if not legally,” laughing that as Arabs it was useless to attempt legal integration.
Mohammed Rashid al-Ballaa, chairman of Mubasher, a brokerage firm and e-financial services provider, put forward his company as the solution for the “multiple problems preventing Arab markets from working together.”
After Ballaa spoke, technological integration became the conference buzzword, as more stringent measures, such as a pan-Arab regulatory body or clearinghouse, proved too daunting or undesirable. Many delegates expressed support for adopting either Mubasher or a comparable system to integrate Arab stock exchanges’ software.
Market projections
The need for change in Arab investor culture became apparent as the conference wore on, from the current pool of short-term retail investors to long-term institutional investors. Saleh Nasser, the CEO of the Egyptian Society of Technical Analysts charted market data, using the Egyptian bourse, to demonstrate that long-term investors would have significantly higher profits than speculators.
Julien Nebenzahl, a board member of the Federation of Technical Analysts, used other market data to demonstrate the cyclical nature of the markets, suggesting that the “inventory cycle” had begun 10 months ago, and that the world was now in a stage of “consolidation.” He forecasted a new rally in prices until the middle of 2010.
Privatize Arab markets
Nebenzahl’s presentation and a dour warning from Essa Kazim, the chief executive officer of the Dubai Financial Market, may be the two strongest messages to have come out of the conference.
Kazim spoke from experience when calling for demutualization, and that “only a privately owned market can be sufficiently attuned to trends to respond appropriately.”
With most Middle Eastern governments still owning the majority of market shares — excluding Palestine — his grim pronouncement was met with both nods and stony faces.
Almost appearing to admonish his colleague from Dubai, the Abu Dhabi Stock Exchange’s Baloushi stated, “I believe the [Dubai] crisis is exaggerated. The money involved is not a huge amount. We need to preserve the institutions that make the economy appealing. It is worse when people relate the matter to the government. This is not appropriate.”
Abu Dhabi’s decision to bail out Dubai reflects the global trend of government intervention on an unprecedented scale, perhaps intended to silence criticisms from those who call for private companies to take over from government control.
At the UASE conference, the one purely governmental representative did not appear. Egyptian Minister of Investment Mohammed Mohieldin missed his scheduled address.
Whether this reflects the belief that the UASE remains a dormant and largely ineffective body, or acknowledgement that perhaps the time has come for Arab governments to step back and allow the markets to handle themselves, remains to be seen and will be largely determined by what level of integration the UASE manages to accomplish.
