Arab stock markets make progress, but still have some way to go.
Stock exchanges, in the Arab World as elsewhere, mirror the economy of a state or region. However, bourses are more than just reflections of changes in the “real” sector, especially in emerging economies. Widening share ownership is usually associated with opening up of economic systems, as business power devolves away from states or oligarchies. Bourses are also places where people or companies raise fresh capital to set up new businesses, or to expand old ones, perhaps the most important of their functions.
In these and other respects, Arab bourses are laggards no more. Developing regional share markets over the past few decades have served to make doing business easier — and help people become richer. When the first oil boom began in the mid-1970s, most Arab countries did not have bourses; today, the majority of regional capitals can boast a stock exchange of increasing size and sophistication. In the context of overall economic liberalization in the Arab World, the establishment, development, and reform of bourses has interacted positively with other change, as more transparent and professionally run share exchanges have emerged hand in hand with liberalizing economies.
Jordan is an example of how things have gone well in this respect, with the Amman Stock Exchange (ASE) proving to be an important element of positive economic change in the country. Last year confirmed this trend, as the ASE general index jumped 36% during 2007, and market capitalization surged by 39% to $41.2 billion, representing 289% of Jordan’s gross domestic product. The latter percentage is one of the highest in the world, reflecting the importance of bourse activity in Jordan’s economy. Moreover, the trend in this indicator is sharply up, with bourse capitalization having been a mere $11 billion in 2003, closer to the equivalent of the Jordanian GDP at that time.
However, the ASE remains dominated by the stock of one business, the Arab Bank, which still makes up a big chunk of market capitalization and activity. Though robust and soundly managed, if that august institution reports any bad news, the whole ASE suffers. Not that this isn’t a feature of other Arab bourses: for example on the Beirut Stock Exchange (BSE), 74% of total trading activity of the last week of 2007 (and the lion’s share of that for the whole year) was in one company, Solidere, the real estate developer, typical of that firm’s dominance of the Lebanese bourse.
Be that is it may, though the Beirut exchange wobbled nervously in 2007 due to the country’s chronic political crisis, the BSE’s landmark BLOM Stock Index still managed a 26% annual rise during the year. Although not as strong as some other Arab bourses, the achievement was quite good, considering lagging Lebanese growth. The beginning of 2008 on the other hand saw shares zooming upward on news of an Arab reconciliation initiative to bring feuding Lebanese factions together, but the next months could still mostly be ones of economic instability — mirrored by an edgy bourse. Still, the Beirut bourse and most other regional exchanges outperformed many of their big brothers in the West, though not the price of oil or gold.
Although the BSE is an extreme case, a handful of key shares tend respectively to overshadow most other Arab bourses. On the Palestine Stock Exchange, for example, the Palestine Telecommunications Company and Palestine Development & Investment Ltd. (better known as PADICO) are dominant, with about 78% of all traded shares in the market in 2007.
Though under present circumstances it is difficult to see massive expansion and diversification on the Palestinian bourse or the BSE, nevertheless, other regional stock exchanges continue to diversify. For example, the 2007 climb in the ASE general share price index was due more to the 31% rise in industrial shares than the 14% gain in the financial sector, which the Arab Bank dominates. This trend has also been evident in most of the rest of the region.
Diversity in the nationality of shareholders is also becoming a more important feature of Arab markets. For example, net foreign investment on the ASE was almost 49% of overall market capitalization at end-2007, compared to the 2004 figure of 41%; non-Jordanian Arabs’ contribution was close to 36% while that of others accounted for about 13%. Sectorally, non-Jordanian ownership of industry stood at 52% while that of the financial institutions was 51% and other services 36%. Though a more smoothly running stock exchange helped, these high percentages would have been unimaginable under restrictive Jordanian investment laws a decade ago, a change toward liberalization paralleled in other Arab countries; and such a trend should get stronger in the years ahead.
RIAD AL KHOURI is Visiting Scholar, Carnegie Middle East Center, Beirut; and Senior Fellow, William Davidson Institute, the University of Michigan, Ann Arbor.
