Regional capital markets begin to shine

This year may go down in history as the year that the Middle East capital markets came of age with many local stock markets performing well in a weak international environment for equities.

For so much is now in the pipeline for this autumn. Privatizations such as Saudi Telecom and Jordan Telecom, the launching of bond issues in Dubai, new trading floors in the UAE, a new public bourse for Saudi Arabia, public share offers in Kuwait and the launch of the Dubai International Financial Centre.

The background to these capital market developments is a solid oil price and a commitment to economic reform by Gulf governments. For a larger and more dynamic private sector needs funding, and that can only come from stronger capital markets. Ironically, of course, the states are the force behind the unbundling of state assets. But the buck now stops with the private sector.

Will the GCC private sector rise to the challenge? With notable exceptions, the signs are not really that encouraging, and instead the burden is passing to the multinational companies and international banks that increasingly dominate trading in this region. Here things look much brighter.

For multinationals, led by the oil majors, are happy to invest in a region with a growing market, and an excellent long term outlook. They note that the world will become more, and not less, dependent on Middle East energy supplies in the future, and see the opportunity to replace inefficient state-owned champions.

World Trade Organization rules also greatly favor this process, with the introduction of global competition to formerly closed markets. So expect to see strategic investors, like France Telecom in Jordan Telecom, play an increasing role in the region.

In Saudi Arabia the eight oil companies promoting the $25bn Saudi Gas Initiative will probably succeed and this will transform the Saudi economy.

Likewise the big global names in international finance will also become more prominent in the business affairs of the region. Goldman Sachs is a prime mover in the DIFC, which has already received declarations of interest from around 70 financial institutions interested in setting up in Dubai.

For local investors these capital market developments will offer a rich harvest of investment opportunities, and a chance to replenish and reorganize share and bond portfolios battered by the adverse conditions in world financial markets. The time for local investment has come.