Analysis There are 18 stock exchanges in the Middle East, eight of which are in the six GCC countries.
Gulf bourses: consolidate or cooperate
Jeff Singer, the head of NASDAQ Dubai, likes to compare the region's stock exchanges with mid-19th century railway companies in North America's frontier lands. "Go back to the 1870s, when the railroad boom was in full swing. Different railroads were laying track literally 100 metres from each other. This competitive behaviour seemed to make no sense. Eventually they rationalised because the customers drove them to it. The same thing is going to happen here." There are 18 stock exchanges in the Middle East, eight of which are in the six GCC countries. The large number did not seem to represent a problem during the boom years, as the rising economic tide lifted all bourses and the hot money from overseas flooded into the UAE on the expectation that a currency revaluation was likely. But now that the hot money has flown and investors have withdrawn from regional equity markets, Gulf stock exchanges are facing an uncertain future. At the same time, emerging centres such as the King Abdullah Financial District and the US$3 billion (Dh11.02bn) Bahrain Financial Harbour are clamouring for supremacy. The problem now is that every exchange is vying to be the main theatre for Middle Eastern business, Mr Singer says. "Some will be more successful than others and the need for high volumes will ultimately bring some of them closer together." This is particularly absurd, experts say, because investors really only care about two, maybe three things at the end of the day: liquidity, the ease of doing business, and the occasional after-work party. Many observers now fear that exchanges will only realise the need to co-operate if trading volumes fail to return to the levels enjoyed in recent years. Simon Williams, chief economist at HSBC, says: "It is just does not make sense for six economies and fewer than 40 million people to have eight unconnected equity markets "The Gulf has benefited from intra-regional competition but it is time to recognise the areas of needless replication, where it would be more beneficial to consolidate and cooperate." Instead of consolidating, however, regional stock exchanges and financial free zones are pitting themselves against each other, all competing to attract international corporations but with little to differentiate themselves from each other. That approach may have to change if Gulf states are to develop their -international visibility, says John Sfakianakis, chief economist at SABB in Riyadh. Each bourse must develop a core competency, he says. "But do they realise that there must be greater specialisation? No. Is there an understanding that not all can become leaders in the financial sector? No," Mr Sfakianakis says. Bahrain, for example, is developing its own financial free zone, the Bahrain Financial Harbour. According to its website this will "reinforce Bahrain's unique position as the -financial capital of the Middle East." It also advertises itself as "the most respected financial regulator in the Middle East." Yet other emerging financial centres in the region are also making similar claims. Meanwhile, Saudi Arabia is looking to build its own financialcentre, the King Abdullah Financial District. The 36bn riyal (Dh35.26bn) project on the outskirts of Riyadh is part of the country's plan to diversify its economy away from hydrocarbons. It says it wants to "ensure the sustained dominance of Saudi Arabia as the largest economy and financial centre within the region." While the kingdom has taken many steps to open its markets and improve institutional regulation, notably its central bank, the Saudi Arabian Monetary Agency (SAMA), in recent weeks SAMA's reputation as one of the region's best regulators has been tainted by the financial troubles of the Saad and Al Gosaibi family conglomerates. Last year Saudi Arabia's Tadawul stock exchange opened share trading to foreigners and in June it allowed brokers to trade conventional and Islamic bonds, or sukuk. "Saudi has one clear advantage: they have the capital. A huge concentration of money makes a big difference. Saudi Arabia also has the largest GDP by a long shot and its banks are more experienced than other GCC banks," Mr Sfakianakis says. There is speculation that the kingdom may also consider allowing derivatives trading although this may be some way off, given current attitudes towards financial instruments and the Islamic prohibition on short-selling stocks. For outsiders visiting the region from London, New York or Frankfurt, the frantic competitive build-up is hard to understand. According to Mr Singer, "everyone outside the region scratches their head and compares this against the backdrop of developed markets. But many of these exchanges were founded only since 2000, they need time to incubate and attract liquidity." He knows what he is talking about. Nasdaq Dubai, founded in 2005 within Dubai's financial free zone, has had plenty of teething pains. It has struggled to attract liquidity and its trading volumes remain a far cry from that of its neighbour, the Dubai Financial Market (DFM). Most trading is in the stock of DP World, the port operator, followed by the jeweller Damas and then Depa, an interior design company. One investment banker privately calls Nasdaq Dubai a "failed concept". Second, most of its trading involves institutional investors, half of whom are remote members in London and New York, who value its biggest selling point, the ease with which foreigners can buy regional shares. Nasdaq Dubai is now honing its focus to attract more retail investors and more local brokers. It has also launched 20 future contracts on stocks listed in the UAE, enabling investors to sell short for the first time. A short seller bets on the market to fall. He borrows stocks from a third party to repay them later on. Volumes reached 11,000 traded contracts last month, up from an average of 3,000 in earlier months. Others are bidding to replicate Mr Singer's attempt to create a thriving derivatives market. Doha's Qatar Exchange, in which the transatlantic NYSE Euronext recently took a 20 per cent stake, is also planning to look beyond equities and add derivatives and commodities to its offerings. Doha is thriving on booming gas exports, which are less vulnerable to price fluctuations than oil, and is expected to grow faster than all its regional peers. In addition, the Qatar Investment Authority, the nation's sovereign wealth fund, has taken what are considered the most drastic measures in the region to stabilise its banks. It has bought banks' property assets as well as companies' stock investments. Some observers say the arrival of NYSE Euronext, a fierce competitor of Nasdaq, in the region has further raised the stakes. NYSE Euronext already helps the Abu Dhabi Securities Exchange with its plans to launch new products derivatives, while Kuwait's bourse has reportedly hired OMX to help develop its trading systems. The real test could come when companies chose their location to list during the next round of IPOs. Companies returning to the markets or expanding after the crisis will face a difficult choice between the different regional stock exchanges. But existing financial centres with functioning infrastructure and long-standing occupiers may hold a first-mover advantage. At HSBC, Mr Williams believes the crisis has made Dubai even more attractive because it has become more affordable. "Dubai took a long time to build up and develop its financial centre role. It will be very difficult for anyone to displace it as the regional leader," he says. firstname.lastname@example.org