How Homogeneous Are the Stock Markets of the Middle East and North Africa?
Bley, Jorg, Quarterly Journal of Business and Economics
Stock markets in the Middle East widely have been ignored by international investors due to imposed restrictions on foreign stock ownership, the lack of common accounting standards and corporate transparency, and economic and political uncertainty. As a result, recent large scale privatizations and stock market liberalization efforts in several Arab countries went unnoticed by the international investment community that often lumps the stock markets of the Middle East and North Africa (MENA) region together because of geographic proximity and perceived economic or political similarity. By taking a closer look at various MENA subsamples, Omran and Gunduz (2001) and Girard and Ferreira (2004) find the regional stock markets to be segmented. A glance at Table 1 confirms that economic conditions across MENA economies are different. For example, on a purchasing power parity basis, the GDP per capita in the MENA region ranges from $3,710 (Egypt) to $40,800 (Qatar). With the exception of Oman, inflation-adjusted economic growth rates exceed those of most developed economies. The average real GDP growth rate of 5.7 percent in the region of the Gulf Cooperation Council (GCC), which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, is among the highest in the world, with Qatar (8.7 percent) taking the lead.
Regional stock markets differ tremendously in terms of size and liquidity. While Lebanon and Tunisia have market capitalizations of $2.2bn and $2.4bn, respectively, the market value of equity listed at Saudi Arabia's stock exchange reached almost $238bn in 2004. In less than two years, total GCC market capitalization increased 161 percent, from $163.3bn in 2002 to $427.2bn in September 2004. While the highest market growth rates were experienced by Qatar (+230 percent), Bahrain grew only 65 percent. Founded in 2000, the combined market capitalization of Dubai and Abu Dhabi ($67.1bn) have elevated the UAE stock market to the second largest stock market in the GCC region, closely followed by the Kuwaiti stock market ($65.9bn), which was established more than twenty years ago. In contrast, the non-GCC stock markets of the MENA region grew at significantly lower rates or not at all. For example, the market capitalization of the Egyptian and Lebanese stock markets increased only 35 percent and 5 percent since the end of 2000, respectively. Over the same period, stock markets in Tunisia and Morocco lost about 15 percent and 45 percent of their respective capitalizations. The primary markets are most active in Kuwait, where the number of listed companies increased to 114 from 86, and the UAE with 49 listed companies since market inception in 2000. In terms of daily trading volume, stock markets in Saudi Arabia ($1,930m), Kuwait ($184m), Israel ($181m), and the UAE ($113m) are the most active in the region.
With high oil prices financing necessary economic reforms, low interest rates limiting opportunity cost of equity investing, and legal and regulatory stock market reforms reducing required equity risk premium, the region's prospering financial markets seem to be headed for a bright and prosperous future. The developments of functioning capital markets can promote economic reforms even further by more efficiently allocating investments to new industries, widening the investor's base, and ultimately reducing local companies' cost of capital. Stimulated by strong fundamentals and high demand for stocks in the Arab Gulf states, $3.2bn in IPOs were placed in the region in 2004, compared to $808m in 2003. (1) The year 2005 is scheduled not only to witness a further increasing number of IPOs but also the launch of the single biggest equity issue in the history of the MENA region. The IPO of UAE's Addar Properties will raise the equivalent of $102.6bn, an amount that would exceed the country's 2003 GDP by about $25bn. The Addar IPO, which is larger than the country's entire market capitalization, was closed early on November 25, 2004, as it was 448 times oversubscribed. …