This article looks at the recent reasons for Arab interest in regulating their domestic equity markets, and especially highlights the impact of attracting foreign portfolio investment and the role of privatization.
Arab countries vary considerably in their tolerance of foreign corporate ownership. As opposed to offering some access to foreigners to invest in their equity markets (as is the case in most Arab countries), Egypt and Morocco for example offer unfettered access to investors regardless of nationality. In regard to the GCC countries, restrictions on local corporate ownership were abolished vis-à-vis Gulf citizens only (after the December 1994 GCC summit which permitted Gulf citizens to buy shares in any GCC company), and still apply to varying degrees to non-GCC citizens.
Additionally, while Oman allows foreign mutual funds to own up to 49 percent of listed companies, Bahrain, on the other hand, stipulates that non-resident foreigners can only buy up to 24 percent of shares in listed companies.
Additionally, the Muscat Securities Market in Oman in 1999 boasted the highest percentage of foreign-owned equities in listed companies in the Arab Gulf region, reaching 15 percent.
Jordan in 1997 scrapped the 49 percent restriction on foreign ownership.
Faroise de Consentre and the American United Soft Drinks Production became the first wholly foreign-owned companies operating in Jordan after buying all the shares of Coca-Cola Jordan.
Fully liberalized Jordanian sectors, which are open to foreign investors, include transportation, insurance, banking, telecommunications and agriculture.
However, construction, retail, trading and metallurgy sectors were excluded.
Allowing foreign corporate ownership in Jordan considerably increased foreign equity ownership in Jordanian listed companies.
Compared to 1996, non-Jordanian equity purchase in Jordanian listed companies increased 12-fold in 1997, reaching 39.1 percent.
Egypt has also had a substantial increase in foreign trading on its equity markets, from 34 percent in 1997 to almost 50 percent in 1998. This is a remarkable achievement for Egypt, given the fact that it renewed trading on its formal bourse only in the early 1990s. Additionally, half of the foreign investors in Egypt are now buyers rather than sellers.
However, some estimate the percentage of foreign participation in Egyptian stock markets to be 20 percent. [The reason for the discrepancy in statistics can in large part be attributed to the inclusion of Arab investors in the ratio of foreign investors, as opposed to calculating it solely on the basis of foreign non-Arab investors which reduces the ratio.] Permitting foreign portfolio investment on Arab equity markets was received favorably by international investors, especially Western investment houses.
Yet, one must point out that foreign portfolio investment in Middle Eastern equity markets is also influenced by collective political developments, particularly security.
For example, following the victory of the pro-Western forces at the end of the 1990 Gulf war, net foreign portfolio investment (NFPI) reached a record $29.9 billion at the end of 1991 (when considerable hype was made about the creation of a "new Middle East order", especially at the launch of the 1991 Madrid peace conference).
NFPI also sustained high levels, reaching $18.1 billion in 1993, which represented an increase of $6.8 billion from 1992. But with the sagging of the peace process (especially after the political stalemate during Netanyahu's government) NFPI in Middle East equity markets declined to $3.7 billion and $2.8 billion in 1996 and 1997, respectively.
However, with gradual improvements in the region's geo-political conditions, NFPI in Middle Eastern equity markets has since picked up to register $10.8 billion in 1998. But by contrast, net foreign direct investment remained modest.
Finally, one may conclude by saying that overall foreign portfolio investment in the region remains meager compared to the level of investment in other emerging markets. For example, total capitalization of Arab stock markets in 1997 was less than 1.5 percent of the $1,000 billion representing market capitalization of the rest of the emerging markets.
In the same year, the region as a whole was also believed to have attracted less than 1 percent of the total capital flows into developing countries, and about 0.3 percent of foreign portfolio investment. However, one must add that in 1998, the overwhelming majority of emerging markets were hit by a crisis that precipitated a return of -22 percent on the all-country IFC-Investable index.
In this respect, the value of new equities issued in emerging markets in 1998 was 60 percent below its value in 1997, though in the first six months of 1999 it picked up to reach $15 billion exceeding the overall mark of $10 billion reached in 1998. ― (Jordan Times )
By Lu'ayy Minwer Al Rimawi — a researcher on regulation of Arab capital markets at the London School of Economics.
© 2000 Mena Report (www.menareport.com )