As the doctor says after tests, there's good news and bad news for the stockmarkets of the Middle East. The good news, especially for the Gulf, is that oil prices have recovered. The bad news is renewed political instability in Israel and the Palestinian Territories, and what may be the beginning of a global slowdown.
By far the most important factor in undermining confidence has been the outbreak of the second Palestinian intifada (rising) in October 2000, which still shows no signs of nearing its close. Although many of the affected markets bounced back from the shock, few made much real progress either. This has been compounded during 2001 by fears of a slowdown in the US, and possibly the world economy. Ironically, 2001 should have been a vintage year for the region's stockmarkets: with the exception of Israel, all of the bourses, to varying degrees, are highly sensitive to oil prices, and in mid-2000 prices began to climb from lows of USD10/barrel, reaching over USD30/b at times. Oil price movements usually take 12-18 months to feed through to consumer spending and financial markets, meaning that mid-2001 should, under normal conditions, have been a time of rapid rises in indices.
Stockmarkets in the Middle East have a potentially very important role to play in the region's development. In the paternalistic (and unsustainably expensive) welfare economies of the Gulf, which are badly in need of diversification away from the volatile income provided by oil, bourses offer a route in for foreign investment and capital for the private sector. Such benefits are also needed in the developing economies of North Africa and the Levant, especially in those countries which are still throwing off the yoke of war or socialism, such as Lebanon and Egypt. Israel, for its part, is a rather different case - it is still acutely sensitive to political upheaval, but has a stockmarket that reflects its developed economy.
Despite the clear need for expansion of capital markets, many of the Arab countries continue to place considerable restrictions on their bourses. Some, such as Baathist Syria, Libya and Saddam's Iraq, have no capital markets. The Gulf states, in varying degrees, exclude foreign investors from their markets, showing a residual fear of foreigners controlling and exploiting their resources, as in the early days of Gulf oil. The non-oil Arab states in North Africa and the Levant are in general more open, but still limited numbers of active listings, transparency problems, and uncertain liquidity, and a casino culture mean that they do not receive as much interest as perhaps they merit - portfolio investors can choose from Asia, emerging Europe and Latin America, and will go where conditions are most favourable.
The Gulf
The six Gulf Co-Operation Council (GCC) countries - Saudi Arabia, UAE, Kuwait, Qatar, Bahrain and Oman - all have stockmarkets, each with its own idiosyncracies. The common feature of the larger exchanges is a restriction on foreign ownership of shares.
Yet this seems to be changing, largely as a result of recent lower oil prices placing pressure on national budgets. Rulers began to realise that as populations grow (and they are growing very rapidly in the Gulf states), the old system of redistribution of oil revenue will be inadequate to support them. It is worth remembering that the GDP per head of Saudi Arabia is circa USD7,000, compared with USD11,740 for Greece and USD18,710 for Ireland.
A diversified, dynamic private sector is needed, and efficient, open and transparent stockmarkets are a crucial facilitator of this aim. In 2000 Saudi officials announced that radical liberalisation was on the way. This would include possible foreign ownership of land, companies, and shares, as well as privatisation, perhaps by IPO, of the country's water, electricity, and telecoms utilities, as well as Saudi airlines and SABIC, the downstream petrochemicals company.
It is never wise to bet on the reform plans of Gulf regimes until they at least start delivering, but it now seems that the Saudis fully realise the urgent need for reform. Against this, ironically, the recovery in oil prices may lull the Saudis into a false sense of security, and delay reforms. Certainly, the state of the country's over-the-counter market reflects confidence arising from strong oil prices - the market started climbing in June 2000, peaked in August, and has remained buoyant since, having gained 12% during the year.
The situation in the UAE capital markets is becoming increasingly eccentric. During 2000 the country's over-the-counter market was joined by two new formal markets, the Dubai Financial Market and the Abu Dhabi Securities Market. Now all three are operating simultaneously, to little advantage. Privately, traders and officials alike admit that what the UAE needs is one centralised, integrated stockmarket, but that rivalry between the oil-rich emirate of Abu Dhabi, the capital, and the trading-based emirate of Dubai precludes such an arrangement. Meanwhile the dominant stock on the DFM, the property developer Emaar, continues to confuse the market with gnomic statements, and its resulting undervaluation is depressing the market as a whole.
The Kuwait Stock Exchange has failed to generate any excitement in 2000 and 2001, despite the recovery in oil prices. It hit six-year lows in January 2000, partly as a reflection of frustration at the government's failure to implement reform, and occasional jitters over the threat posed by Iraq.
Despite its small size, and losing a fifth of its value in 2000, Oman's Muscat Securities Market (MSM) continues to be regarded as the best-run and most open market in the region. It places no restrictions on foreign investors, and demands regular, international standard reporting from listed companies, in contrast to the almost complete opacity of listed companies in other Gulf states. Bahrain, with its strong international financial sector and excellent central bank, is almost equally well-regarded. Both, however, suffer from their small size - they pass under the radar of investors. A Gulf-wide stock exchange combining the management of the smaller countries' bourses, with the attractive companies of the larger countries, would have far greater clout. It is not around the corner - just as a combined European stock exchange is not about to materialise - but many involved in the markets see it as project for the future that could inject much-needed liquidity.
North Africa & the Levant
The largest and most international of the stockmarkets of North Africa & the Levant is Egypt. Against a background of a population of 66m, and a broad (though haltingly progressing) government programme of liberalisation and privatisation, Egypt's Cairo & Alexandria Stock Exchange (CASE) saw impressive growth in the 1990s, particularly in 1996 and 1997. In particular, its thriving telecoms sector, led by Orascom Telecom and MobiNil, gave the exchange a more tech-heavy profile than other Arab markets.
However, the CASE has been particularly hard hit by external developments. First, in October 2000 the market crashed in response to the outbreak of violence in Israel and the Palestinian territories. It then rallied in December, only to dip again in February, partly owing to a loss of confidence owing to the crash in the Turkish market. Subsequently, the CASE's tech strength has left it more vulnerable than other markets in the region to catching the tech-led flu afflicting the US markets. On April 1, 2001 the market stood at its lowest point for seven years, having lost 20% of its value in local currency terms since the start of the year.
Despite this, the CASE's long-term future seems among the rosiest in the region. In particular, announcement of its inclusion in the MSCI Emerging Markets Free Index in July 2000 made it more accessible and comprehensible to foreign investors. It will be added to the index in May 2001. Second, the privatisation programme, despite confusion over the sale of cement companies, still holds some attractive propositions. These include remaining cement companies, state insurers, and Telecom Egypt.
The Beirut Stock Exchange (BSE) has had a yet rougher time. After peaking in May 2000 in the wake of the election of Ehud Barak as Israeli prime minister, and Israel's withdrawal from South Lebanon, the market plunged in October in reaction to the Palestinian intifada, and has continued a more or less unbroken decline since, with a short-lived recovery in February 2001 in response to the election of Rafic Hariri as prime minister. Lebanon's economic fortunes are as closely tied as any economy to political developments, and the continuing violence, exacerbated by Barak's defeat by the hawkish Ariel Sharon, has strangled confidence and liquidity: during 2001 there have been several days when not one share has been traded on the BSE. The market giant, the Beirut reconstruction company Solidere, is closely associated with the prime minister, and might have been expected to soar on his election. Yet Solidere's fortunes are perceived as being largely reliant on foreign companies relocating to Beirut - which is unlikely to happen in the current climate of unceratainty. The impending government debt crisis is unlikely to improve the fortunes of the BSE.
Although it has since recovered somewhat, the Amman Stock Exchange fell precipitously in response to the intifada, as did the tiny, informal Palestine Securities Market.
East of Egypt, Tunisia's Stock Exchange is performing remarkably well, climbing strongly from May to October 2000, and subsequently retaining most of its gains, making it the best-performing market in the region ion 2000 and early 2001. Benevolent macroeconomic conditions in the country are helping the exchange to remain buoyant. Morocco, by contrast, has had a poor year, and crashed in sympathy with the Istanbul Stock Exchange in February 2001.
Israel
The Tel Aviv Stock Exchange (TASE) is a very different proposition from the neighbouring bourses. With its plethora of world-leading tech and pharmaceutical companies, and its highly developed economy, Israel is the only official OECD emerging market in the region. For example Teva, listed on the bourse, is the world's leading maker of generic pharmaceuticals, recently issued a USD550m bond, and is currently hunting for drug companies to acquire in Europe. Companies with this sort of innovative, export-led profile and level of sophistication are, frankly, thin on the ground in Arab countries.
Yet ironically the private sector is so advanced that it has to some extent marginalized the TASE, as leading companies look to the US for rapid capital and liquidity. Over 100 Israeli companies are listed in the US, 83 of them on the NASDAQ (many as American Depository Receipts, ADRs), and together they have a higher capitalisation than the TASE. During 2000 Israel amended the capital markets law to allow dual listing and draw companies back - while some are expected to do this, few are likely to abandon the US markets.
With the upsurge in Israeli-Palestinian violence since October 2000, and the stalling of the US economy, the TASE has been hard hit. Its close linkage to Wall Street, and the high level of foreign portfolio investment, has historically made it move almost in parallel with the NASDAQ. The sense of doom currently prevailing on the NASDAQ has also hit companies on the TASE. This has been exacerbated by the weak shekel and capital flight, and by a depressed macro economy. Whereas growth of 5.9% was recorded in 2000, analysts predict 2% or less for 2001. And the current preoccupation with the Palestinian issue means that Ariel Sharon, like Ehud Barak before him, is unlikely to pay much attention to reforms such as privatisation, structural reform, and restructuring of utilities. Despite all of this, Israel's stockmarket remains a dynamic partner to its entrepreneurial private sector, and in a different league to others in the region.
Outlook
For the Levant bourses in particular, the development of the Israeli-Palestinian situation will be crucial. At present, the situation is not especially promising: Israel has elected a new hardline prime minister, Ariel Sharon, and moderate elements in the Palestinian Authority are losing ground to radicals as the right of return of Palestinian refugees and the status of Jerusalem remain unresolved. At the back of investors' minds is the possibility of the conflict developing into a regional war, and this fear will remain until there is a halt to daily violence between Israelis and Palestinians.
On the other hand, oil-based economies may start enjoying greater stability, protecting their stockmarkets from oil-price volatility. OPEC is meeting increasingly often in an effort to micro-manage oil prices, probably aiming for a stable price within the USD25-30/barrel band.
While this might prevent economic swings at home, it will do little to improve the wider global economy, which is already showing alarming signs of a slowdown. With the exception of Israel, and possibly Egypt, the regions bourses are well-protected from the vagaries of the global economy. This is partly a result of low export levels. Another reason is the restriction some of them place on foreign stock ownership, or of the reluctance of international investors to buy in - jittery Wall Street traders do not hold many Middle East stocks, so cannot dump them.
The idiosyncracies and irrational features of some of the region's markets provide a further protection; just as Lebanese sovereign debt sells at a lower spread than its international credit rating would indicate, because Arab investors make their own assessments, so Lebanon's stockmarket actually climbed during the Asian and Russian crises in the 1990s. Although a downturn in the global economy is clearly undesirable, Middle East markets are likely to be less affected relative to Asian, Latin American or Central European stockmarkets.
A pan-Arab bourse remains as far off as ever, despite the manifold advantages of such an arrangement. Thus far, notwithstanding a number of cross-listing agreements, the Ittihad al Boursa Arabiya (Union of Arab Bourses) has so far failed to produce any concrete results. In January 2001, however, the Dubai Financial Market, Bahrain Stock Exchange, and the Amman Stock Exchange announced that they were discussing the possibility of a NASDAQ-type joint tech exchange, and said that it might be operational by 2002. This certainly chimes with the plans of several of the Arab countries - Dubai has set up a much-hyped 'Internet City' free zone, and Egypt aspires to a similar role as India in Middle East IT. Excepting telecoms, there are at present few interesting tech-sector companies in the Arab countries, but a new tech market, if it is indeed brought into existence, might offer much-needed capital and encouragement to entrepreneurs in the sector.
Despite the political troubles besetting the region, and the state of the world economy, Middle East stockmarkets, by and large, are in surprisingly good shape. With the exception of Israel they are unusually well able to ride out global downturns, and high oil prices are keeping the Gulf markets healthy. In order for this promising base to translate into broader economic benefits, and cease to resemble a casino, it now remains for political leaders to establish greater openness, transparency, and efficiency in the regions stockmarkets.
