Introduction for the Special Issue on Emerging Financial Markets of the Middle East

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ABSTRACT

The emerging financial markets of the Middle East and North Africa, i.e., the financial markets of Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, and Turkey are less known and researched. This paper introduces each economy, its financial markets and the roles of foreign investors. The region's growth is lagging due to poor integration into the global economy, higher-than-average population growth rates, lagging political reforms, a large public sector, and underdeveloped financial markets partly due to high trade restrictions and inflexible exchange rate policies. Continued reforms of the financial sector would bring greater financial development and increasing globalization, albeit challenged by strong government interference.

JEL: E0; E1; F3; F4; G1; N2; O4; O5

Keywords: Middle East and North African (MENA) Emerging Financial Markets; Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, Turkey; Foreign Direct Investment; Globalization and Growth; Iraq War; Gulf War; Macroeconomic and Financial Indicators.

I. INTRODUCTION

The looming threat of a war in Iraq had finally become a reality on March 20, 2003. While this threat caused continuous uncertainty and a negative impact on the global market, it also undermined Middle East and North African (MENA) stock markets and brought the region's economies to a standstill. Although the commencement of the war eliminated the ambiguity that had dominated the markets in the previous months (causing crude oil prices to surge above $33 a barrel, pushing stock market indices and consumer confidence even lower), the developing MENA region is still confronting the challenges of spurring recovery and initiating structural reforms. While the military conflict may have had a compounding impact on foreign direct investment and other foreign-based income, the root of the problem precedes the war, going back to the political regimes and economic policies that dominate the region. Even while the region's oil production remains the most important factor in MENA's economies, the topics of most interest for this issue are the emerging markets in the area that present potential opportunities for global investment. As a consequence of constant political friction and tight political controls, foreign investment remains minimal. Yet, this is necessary to assure the region's economic development.

The question one naturally asks is: why are MENA countries lagging behind growth and globalization? Some of the factors include poor integration into the global economy, higher-than-average population growth rates outpacing employment rates, lagging political reforms, a large public sector, and underdeveloped financial markets partly due to high trade restrictions and inflexible exchange rate policies. Continued reforms of the financial sector would bring greater financial development and increasing globalization, albeit challenged by strong government interference.

Upon initiating this special issue about two years ago, there was high potential and expectation for future growth. However, the sluggishness in the world economy and the increasingly hostile situation in the Middle East have reversed most economic forecasts and caused the regional markets to loom in a state of uncertainty. The process of globalization has created important interdependence between international markets, businesses, and nations. The countries surrounding Iraq are faced with greater risk and the impact of the outcome is of even more immediate concern. A regime change in Iraq would lead to a significant adjustment in trading partners and their economies while at the same time, possibly opening up lucrative opportunities for Western nations. The economies that are particularly of interest for this special issue of the journal are those of Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, and Turkey. Since these newly emerging financial markets are less known and researched, the next section of the introduction presents a brief summary of each economy with a particular emphasis on its financial markets and the specific roles and interests of foreign investors. To gain a better understanding of the current financial state and future potential development, each country's economic background and development are introduced. Next, studies relating to the MENA region that are presented in this issue are summarized. These papers are by Tzachi Zach; BenZion, Klein, Shachmurove, and Yagil; Girard, Omran, and Zaher; Muradoglu, Zaman, and Orhan; Hadi Hassan; Hakim and Neaime; and Mohammed Omran. Through the papers included in this issue, it is hoped that new possibilities will arise for further research of the area.

II. AN INTRODUCTION TO MIDDLE EAST AND NORTH AFRICAN COUNTRIES AND THEIR FINANCIAL MARKETS

This section introduces the major Middle Eastern and Northern Africa economies and their financial markets. In order to facilitate further referencing to these markets, each country is presented alphabetically.

A. Bahrain

Bahrain's heavy regional dependence on trade and its central location among Persian Gulf countries have a direct impact on its economic condition given any changes in oil prices or political stability. With the approval of the National Action Charter in February 2001, the new amir introduced economic and political reforms aimed at achieving sustained growth, economic diversification, and making Bahrain a regional banking and financial center. The development of information technology infrastructure and privatization of the economy and service sectors will be of particular importance in the process. The Bahrain Stock Exchange (BSE) is one of a number of developing stock markets in the region concentrating on diversifying the range of securities listed to develop the region's capital markets. There is no taxation system on foreign investors. Resolution NO. 1 of 1999 permits non-Bahrain's to own and trade in Bahraini joint-stock companies' shares. The citizens of Gulf Co-operation Council (GCC), i.e., those of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, are allowed to own up to 100% of these shares. However, other foreign investors are limited to only 49%, limiting the attractiveness to foreign entrepreneurs. (1)

The BSE reported a modest performance in 2002, rising by 3.41% after falling by 2.45% in 2001. It started 2002 on a positive note, but faltering optimism about 2001 dividends and periodic profit-taking caused losses to fall to as low as 4% in the second week of October. BSE recovered in the last two months of the year on strong third-quarter corporate results, higher oil …