Arab interest in regulating its capital markets
The following article looks at the recent reasons for Arab interest in regulating their domestic equity markets. It especially highlights the impact of attracting foreign portfolio investment and the role of privatization.
An article I wrote recently mentioned the role of Arab stock exchanges in facilitating the process of privatization, which entailed substantial equity diversification in terms of ownership and corporate control. Kuwait was seen as a prime example of a successful Arab country who utilized its equity markets in its privatization drive.
Particularly in the Kuwaiti context, methods of share disposal varied from block public auctions using the facilities of the Kuwait Stock Exchange (KSE) to selling listed shares at a discount to mutual funds. Additionally, primary issues through offering shares to the public and direct (secondary markets) sale of listed shares to small investors were also used. For their part, primary issues were of significant importance in the Kuwaiti experience — between September 1994 to December 1997, for example, the government offered 771.38 million shares which attracted more than 200,000 subscriptions.
Indeed one can further argue that the mere fact that formerly public held companies are now listed on local capital markets, has also given added incentives to foreign investors to participate in the privatization process, knowing that they can always consolidate their equity holding through the market. For example, when the Jordanian government sold off 33 percent of its share in the Jordan Cement Factories Company to the French company Lafarge in late 1998, Lafarge consolidated its control through buying extra 6.9 percent of the shares on the Amman Bourse — thus raising its stake to nearly 40 percent.
Moreover, as a result of privatization many Arab countries now boast with equity markets that list almost all the major companies in the national economies. For example in the past four years, the number of listed companies on Arab equity markets increased by a healthy 30 percent. From 1,194 at the end of the fourth quarter of 1996, the number of listed Arab companies reached 1,549 by the end of the second quarter of 1999.
The role of the private sector is also likely to be enhanced through the many industrial non-oil projects which are on the increase in order to offset plummeting oil revenues. For, many GCC countries are becoming less dependent on oil as main export and are diversifying their national economies. (Mainly by building petrochemical industries with significant potentials for private sector contribution). In the UAE, for example, non-oil sectors contributed 63 percent of the GDP in 1995.
Moreover, the non-oil revenues of Abu Dhabi (which generates 90 percent of the UAE's federal income) grew at an annual rate of 20 percent in 1998. In a similar vein, Oman is also lessening its dependence on oil revenues and diversifying its budgetary revenues through opening up the economy to the private sector to invest in pharmaceutical, banking, services and petrochemical industries. While in recent years it stood at 65 percent, total oil revenue in Oman's 1999 budget is likely to decline to 39 percent.
The capitalization of most Arab equity markets has also, on the whole, been increasing. For example, in the first quarter of 1997 capitalization of Arab equity markets was $121.581 billion compared to $108.251 billion in the last quarter of 1996. This appreciation continued generally to rise reaching $127.000 billion in the second quarter of 1999. Recent deepening of Arab equity markets was not only the result of privatization or the listing of more formerly off-limits companies, but also due to unprecedented large-scale Arab acceptance of foreign portfolio investment on their equity markets.
Although it is commonplace for Western capitalist economic systems (and the majority of emerging economies) to allow foreign investment, such a practice was prohibited by Arab countries. Again, the reason for this was due to Arab notions of sovereignty over national corporations and deep-rooted suspicion of foreign control over local companies, especially the strategically important ones (such as telecommunications, utilities, industrial, banking, transport, mining, etc). Additionally, the official rhetoric that was deployed by many Arab countries, which saw in foreign ownership of local companies a vestige of colonialism, made Arab culture generally averse to foreign presence even on an innocuous commercial level.
This hostile culture has, however, been gradually changing since the early 1990s due to a convergence of political and economic reasons. Such convergence can especially be illustrated after the unprecedented multilateral 1991 Madrid peace conference and Arab need to find alternative sources of external financing.
In this respect, the Middle East and North Africa economic summits, various Euro-Mediterranean agreements, coupled with Arab countries' desire to join multinational treaties like the WTO, have added considerable impetus to the momentum of opening up to foreign investors. Egypt, Tunisia, Jordan, Lebanon, Morocco, Oman, Bahrain and the Palestinians were among the first Arab countries that adjusted their regulations to allow foreign corporate ownership. — ( Jordan Times )
By Lu'ayy Minwer Al-Rimawi
© 1969 Mena Report (www.menareport.com)