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Economics & Finance

Can there be financial transformation in the Middle East?

Shellie Karabell |

The Chief Economist of the Dubai International Financial Center describes his vision for economic growth, consolidation and investment in one of the world’s most diverse regions in the Middle East?

Nasser Saidi is a man for all seasons, a man for the world. Born in Lebanon, educated in the US, he’s been an economics professor (University of Chicago, Hautes Etudes in Geneva), First Vice-Governor of the Lebanese Central Bank, Minister of Economy & Trade as well as Minister of Industry in Lebanon. He has also been a member of the UN Committee for Development Policy, and - since 2006 - Chief Economist for the Dubai International Financial Corporation. In this role, he is charged with the responsibility of helping to develop the financial future of the UAE and the region.

With his snowy white hair, piercing blue eyes and modest manner, the man does not mince words in any language to describe the financial reforms necessary to bring the Middle East into the 21st century.  “If you look at the financial structure in the Middle East”, he says, “unlike the rest of the world it is unbalanced: that is, the bulk of finance comes from the banking sector - some 55-60 percent, another 30 percent comes from the equity markets, and the debt markets are severely under-developed”.

Developing debt markets

In developed countries, debt markets are where mortgages are made, and the lack of this financing in the Middle East has consequences beyond finance, says Saidi. “Young people are not able to get housing, are not able to get apartments; therefore they cannot form families and there are all sorts of socio-economic consequences resulting from this. …you also need access to finance for small and medium-sized companies (SME’s) and young entrepreneurs. Our equity markets are very much geared to the needs of big companies.”

Saidi draws a link between the lack of widely available financial services in the Middle East to the recent unrest in the region. “Take the case of Egypt,” he says. “Only 10 percent of households actually have a bank account. And if you don’t have a bank account then all those financial services are not available to you. It means you’re not really integrated into the market economy.”

These reforms constitute the basis for reform in the Middle East – enabling the region to morph into “emerging market” status (à la Brazil or India) and away from its current “frontier market' classification. “Being classified as ‘frontier’ means that you’re high-risk and therefore you don’t attract institutional investors, because typically the mandate and directive of those investors forbid them from investing in these markets. As a result, we haven’t been able to attract what I call 'patient capital', that is, capital that’s here for the long-run."

Attracting patient capital

Hedge funds are attracted to the region’s Chinese-like growth rates of 10.5-11 percent a year recently, fueled literally by oil and energy. But this is not Saidi’s objective, which is pinned irrevocably to the region’s aim to diversify out of fossil fuels and into a more sustainable, knowledge-based economy. The steps are well-defined.

“The major requirement is allowing foreign investors access to the markets,” says Saidi. This does not happen regularly in the Gulf Cooperation Council countries. In the last few years, foreign investors have had remote access via investment funds, but not direct access to the equities and securities actually trading.

Then there’s the question of size – and it does matter, claims Saidi. Taken together the value of all the bourses of the Arab world are the size of Hong Kong. “Today you’ve got economies of scale that you need to achieve that come from integrated trading platforms, having central securities depositories, having electronic trading and having free access.”

The future, therefore, lies in integration of the GCC financial markets. “It’ll happen,” claims Saidi. “I think it’s very much on the cards.  The economics of it will force integration.  But there are also other factors at work: GCC countries are moving towards greater economic integration, and part of building a common market is integrating your financial exchanges.”

Introducing corporate governance

A sustainable financial future as that envisaged by Saidi cannot “sustain” without corporate governance: sound financial reporting, transparency, accountability. These are necessary steps towards achieving “emerging market” status.  Improving corporate governance is another of Saidi’s missions as the DIFC’s Chief Economist.

The word “governance” did not exist in Arabic five years ago, so Saidi gathered together three linguists and created one: Hawkamah, and founded a non-profit corporate governance group to go with it.  “Today, ‘Hawkamah’ means ‘corporate governance’ in Arabic,” he says. “It comes from three words from Arabic. The first is “houkuma” which is “government;” the second is “hekem” which is “to govern,” and the third is “hekmeh” which is wisdom.”

Hawkamah’s work extends from Morocco to the Indian sub-continent, targeting governments and regulators, banks, financial institutions, Islamic financial institutions, PE firms, and insurance markets, offering corporate governance assessments and assistance in making improvements.

A MENA development bank?

Saidi also has an on-the-ground strategy for improving the financial structure of the Middle East. At a recent economic conference in Jeddah, Saudi Arabia, he proposed a sort of Marshall Plan: a regional bank for reconstruction and development, something that’s usually associated with countries in need such as Africa, Latin America, Asia, which have trouble traditionally in obtaining long-term financing. At the moment, the Middle East has the financial resources to pay cash, and the natural resources to use as leverage, but this is not a sustainable way to create infrastructure or other forms of development. The region is also full of dichotomies, not easy for traditional financiers to navigate.

“We are a region that is very rich and very poor,” says Saidi. “We’re very rich in terms of natural resources but there are also very poor countries in the region: countries like Morocco, Egypt, Sudan and others; and therefore over time as we strive for greater economic integration across the region, we need to have an institution in there - a Middle East North Africa (MENA) bank for reconstruction and development that can help address those discrepancies and the inequalities across the region.”

Saidi says the idea is gaining traction as institutions focused on the MENA region begin to understand better the potential for progress that comes with economic sustainability. “Europe, the US and the supranational institutions such as the World Bank and the IMF see a need for this kind of financing,” he claims. “If you look at the portfolio of the World Bank, only 6 percent of it goes to our region, and yet this is one of the largest regions in the world, with more than 5 percent of the world’s population yet only trivial fraction of the world’s financing.”

A development bank coupled with outside investment could also create better investment opportunities for domestic money. “When we looked it up, we discovered that the financial resources of the region are typically invested outside the region,” Saidi explains.  “So we gladly send our money and have been sending our money to London and Zurich and elsewhere, whereas very little of it has come back. And that’s the reason the DIFC was set up…so that for the first time we can have the ability to manage and control our own financial wealth. That’s extremely important.”

Creating jobs for a young population

Given the GCC region’s financial reserves – running a large budget surplus of between 15-20 percent of GDP – there are still problems in common with its indebted Western neighbors: namely, how to create jobs, particularly for the young. More than 50 percent of the population in the Middle East is under the age of 25.  And creating jobs for them is part and parcel of economic diversification. “You don’t create jobs in the oil sector,” points out Saidi. “You create jobs in everything BUT the oil sector. We need jobs for scientists, engineers, doctors.”

Saidi believes the long-term solution to this problem is to involve the private sector.  “You need to involve the private sector more deeply into the economy. The model for economic development in the region was for governments to play a central role in economic development, but I think we’re over that in that governments have been good about providing infrastructure. One of the best examples of that is Dubai itself, and the UAE where the government built up the infrastructure and it’s a first class infrastructure. It’s there for the private sector to benefit from: you have airports you have roads, you have bridges, you’ve got the international connections, especially to the emerging markets. Take a company like Dubai Ports: more than 60 percent of the facilities they manage are for the emerging markets.”

Financial Reforms Have Grass Roots

Today, the grass roots demand for reform in the Middle East appears to have caught up with Saidi’s vision for the financial development of the region. “Part of the reason we’re getting this requirement for transformation is that the Middle East-North Africa region during the 1990’s did not become globalized. In other words, it did not benefit, it did not integrate itself into the world economy or into international financial markets. So we missed out on that big wave,” he opines. The growth did not trickle down; it did not translate into growth incomes at lower levels and therefore we did not combat and deal with poverty. This is a big part of the financial transformation that needs to take place.”

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