GCC bourses need to coordinate

Gulf oil producers need to expand coordination among their equity markets as part of a strategy to limit the impact of external shocks on their bourses after they were seriously impacted by recent crises, according to the IMF.

The measures should also include diversification of financing sources to increase the reliance of the balance sheets of local banks by limiting their exposure to risks following the 2008 global fiscal distress and regional debt defaults, the Washington-based IMF said in a working paper this week.

The paper noted that the economies of the six-nation Gulf Cooperation Council (GCC) demonstrate a high degree of openness, operate open capital accounts, and have very flexible labor markets, dominated by expatriates.

It said these economies are highly integrated into the global economy through trade and financial sector channels.

Oil - the GCC’s main export commodity - accounts for over 75 per cent of export receipts and about 85 per cent of fiscal revenues, it said.

Globally, these economies are important as net creditors through the recycling of petrodollars and they play an important role in oil and gas markets.

The report showed they account for 40 and 23 per cent of proven oil and gas reserves respectively. They also possess over 70 per cent of Opec’s spare crude capacity thus exercising an important role in stabilising oil prices.

According to the paper, the GCC countries have pursued economic and financial integration for over three decades with a view to establishing an economic union. This has culminated in GCC countries achieving virtually unrestricted intra-regional mobility of goods, national labor, and capital, it said.

While market capitalization to GDP of GCC equity markets is comparable to that of emerging markets, they vary considerably in the degree of foreign participation, it said, adding that the UAE has the highest degree of foreign participation and Saudi Arabia the least.

“Given the increasing importance of financial and trade linkages between advanced economies and emerging markets, including the GCC, some economists argue that emerging markets have become more vulnerable to turbulence in regional and global markets…in other words, the GCC equity markets are not immune from global shocks such as that unleashed by the subprime financial crisis and refute the notion of decoupling between the GCC equity and global equity Markets,” the paper said.

“The impact of regional spillovers to local equity markets were also significant and point to the need for cross-border coordination and supervision to minimise adverse spillover effects….macroeconomic management will need to take into account for the transmission channels through which global shocks impact the domestic economy….in particular, diversifying the sources of financing the real economy would increase the resilience of banks balance sheets by limiting their exposure to the various types of risks. In addition further deepening of asset markets would give firms alternative means of financing investment.”

The report noted that GCC stock markets have largely developed over the past years in terms of the number of companies, capitalization and turnover. In mid June, the combined capitalization of the six markets stood at around $729 billion, nearly 77 per cent of the total Arab  capitalization of $947 billion.

Saudi Arabia, the largest Arab economy and the world’s oil exporter, controlled 37 per cent of the total Arab market capital, with around $347bn. The UAE has the second largest Arab bourse with a capitalization of around $128 billion, including nearly $55.5 billion in Dubai and the rest in Abu Dhabi.

Capitalization stood at around $122bn in Qatar, $110bn in Kuwait, $19.5 billion in Bahrain and around $20bn in Oman, according to figures by the Abu Dhabi-based Arab Monetary Fund. As for IPOs, the IMF paper showed their cumulative value totalled around $43 billion between 2004 and July 2010.

The value hit an all time high of nearly $12bn in 2007 before edging down to $11.6 billion in 2008. It tumbled to around $2.6bn in 2009 and remained as low as $1.28bn in the first seven months of 2010.

Nearly half of the IPOs were issued in Saudi Arabia, standing at around $21.9bn. IPOs were valued at nearly $12.2 billion in the UAE, about $4.5bn in Qatar, $1.8bn in Kuwait and the rest in Oman and Bahrain.

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