At the Union of Arab Stock Exchanges (UASE) conference in Cairo last month, Executive spoke with leading figures from different bourses around the Arab world about the impact of the Dubai World debt crisis, as well as other pertinent issues and trends in regional financial markets. Here is a selection of their answers:
E Was Dubai World’s near default an isolated incident or a symptom of Dubai’s financial situation as a whole?
Ahmed Aweidah, chief executive officer of the Palestine Securities Exchange: The writing was on the wall for Dubai. Everyone knew that Dubai was built on the availability of cheap credit, so during the credit crunch it was obvious Dubai would have problems; but it won’t go bankrupt. Dubai is going through a needed correction. It still has the fundamentals — qualified people, excellent infrastructure, ports and trade — that will allow it to bounce back on a more modest scale, but no more of this ‘tallest skyscraper in the world’ business.
Huseyin Erkan, chairman of the Istanbul Stock Exchange and president of the Federation of Euro-Asian Stock Exchanges: [Dubai World] was not an isolated case. Dubai invested heavily in real estate and was heavily leveraged. Now Dubai World will undergo restructuring as the authorities examine its assets.
Andre Went, CEO of the Qatar Stock Exchange: We’d better hope it was an isolated incident.
Abdullah Almadhi, CEO of Rana Investment Co.: Dubai World’s near default was a result of dryness in the market. The ripple effect of Dubai on shallower markets is greater than it would have been on more liquid markets. With proper amounts of credit to pay back loans, this will be an isolated incident.
Rashed Al-Baloushi, deputy chief executive (DCE) of the Abu Dhabi Securities Exchange: The figures were surprising for the United Arab Emirates. Our growth, gross domestic product, clear strategy and clear vision are moving us toward constant improvement. I think Dubai World was isolated and I am a strong believer in the strength of the Middle East.
E What will be the impact of Dubai World’s near default on the region in 2010?
Thomas Krantz, secretary general of the World Federation of Exchanges: I have no idea. Our only role as markets is to stay open, to assuage concerns. The last thing you ought to do is lock the door.
Erkan: Regardless, there is liquidity in the Middle East. Money stayed home and it has helped offset the effects of the crisis. [Mideast] markets were not as poorly affected; most of the effect was psychological.
Went:The impact on Qatar will be limited. The initial reaction was an overreaction; the market fell 8.3 percent, but recovered quickly and is again over 7,000 points. It is difficult to predict the regional impact of the Dubai crisis; it depends whether foreign investors view the Gulf Cooperation Council as an integrated region or as made up of individual countries.
Massimo Capuano, DCE of the London Stock Exchange Group and CEO of the Borsa Italiana: Devolution is important for general credibility. It is too early to tell if Dubai’s credibility as a whole is damaged, as we’re still waiting for the solution. Dubai remains the most important economy in the Gulf, so the other GCC countries will need to decide what they need to do.
Aweidah: Palestine benefitted from its isolation in both the financial crisis and the post Dubai World downturn. Our stability, low leverage [and] current [foreign direct investment] levels make us attractive to investors. In 2008, we only lost 16 percent. We were the best performers in 2008 and have recovered the most since. We’re up 13 percent now. Everyone said, ‘Oh god, this is a crisis.’ Palestine is in a permanent crisis; it’s nothing new for us.
E Why is the UASE meeting now, a quarter century after it was first established?
Capuano: The UASE is seeking to establish a common ground among its members, so that it can achieve a harmonized evolution of its markets; this has happened in many regions. As in Europe, the markets were once fragmented; then with the implementation of the euro and the European Central Bank it began homogenizing. The Middle East benefits from having a common language in which to conduct business.
Almadhi: We need to make sure that regulators and market participants are in the same place. It is important to sit down face-to-face, to hear the different issues we face and the similarities of our situations, which can lead to unified policies in terms of regulation. If we met on a regular basis I think we’d see more positive results.
Ahmed Saleh al-Marhoun, director general of the Muscat Securities Market: It is not easy to get everyone to agree. But in a crisis, you have to talk together in order to solve it. The [UASE] has been in existence for over 20 years and recently appointed a full-time secretary general with the clear objective of implementing an agenda.
E Is it time for a pan-Arab stock index?
Went:Making an index is easy. One already exists, in fact, the Morgan Stanley Capital International (MSCI) Index; pan-MENA, pan-GCC, take your pick. It’s just a matter of calculating. The next challenge is to develop a trade instrument, like futures or options. Exchange Traded Funds are the new tools used for investment purposes. I’m not sure if a pan-Arab index makes sense. Maybe a pan-GCC index would, because the GCC countries are comparable while the whole region remains so diverse.
Capuano: An index could be useful, as it would attract interest from institutional investors that the region currently lacks. When launching an index, you need liquidity and a strong commitment from liquidity providers. It is worth trying.
Almadhi: No. We need a unified approach to indexing, however. We need to be careful that our markets are not vastly different.
Krantz: It is too soon perhaps. When a market is getting started it tends to be nationally based, and then afterwards becomes inter-country. These markets need to establish liquidity — multiple pools of liquidity that are nationally based.
Erkan: An index is a good mechanism for institutions to follow markets, so a regional index would be a good idea.
E Why are markets in the Middle East subject to such dramatic volatility?
Went:The economic cycle goes faster in the Middle East than elsewhere. It’s a consequence of a non-diversified investment base.
Capuano: [Because of] the small size of the exchanges. I believe in finding the right combination of pools of liquidity together with institutional investors; finance could contribute a lot to developing these economies. There is a lot of potential here.
Almadhi: Two things. The shallowness of the markets, the types of products traded… Second, industrial investors with large holdings in specific companies that don’t act on fundamentals, but hold their own positions and have their own approach to the market.
E What characterizes the Arab investor?
Went:The Middle East has more retail investors than institutional investors. Once the economies move from frontier markets to developing markets, [according to the classification by MSCI] we’ll start seeing more institutional and long-term investors.
Capuano: It is important to address the issue of long-term versus short-term investors. However, encouraging a long-term investment mindset can be difficult. This is a role that technology could play, especially in reassuring investors through regulatory software. Also, a common set of rules could harmonize and stabilize Middle Eastern markets.
Almadhi: Most investors are retailers; they are sensitive to events. They’re short-term speculators. Speculation is healthy but not at such high levels. Add institutional investors, and you get long-term funds that don’t dry up in reaction to bad news. Getting long-term investors just takes putting together a road show and marketing it around the United States, Europe [and] the Middle East.
Al-Marhoun: We need to change the mindset of the Arab investor. The region has a lot of liquidity available for long-term investment. If we can convince funds to be invested in the region, investors would find that returns on investments are higher in the Middle East than in Asia.
E When can Arab markets expect to wean themselves off the price of oil?
Almadhi: The non-oil GDP is growing sharply. We’re diversifying from oil through partnerships with third parties. Abu Dhabi is an example of this, though I can’t speak on their behalf.
Al-Marhoun: There is a clear need for diversification. But the end result won’t come before a year or two. Most Arab countries have begun to diversify. In Oman and in the UAE there is an emphasis on real estate.
