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Attracting International Investors by Protecting their Investments
Date: 14 Aug 2015
Author: Khalaf, Fadi
The Arab region has concentrated mainly, since 2013, on opening its capital markets to international investors. Among the frontrunners of this initiative were the UAE and Qatar, which upgraded by MSCI and S&P Dow Jones to become a part of emerging market indices. Saudi Arabia also opened its market to foreign investment in June 2015. A vast amount of work has been published focusing on the positive outcomes that are expected by following this international trend. They suggest that the Gulf States will inevitably reap the benefits of increased market depth expected by opening their markets. Nonetheless, one must keep in mind that some of the Gulf markets are relatively young, and thus will be sensitive to outside influences and fluctuations within the international domain.
Saudi Arabia, United Arab Emirates and Qatar financial markets were established only about 14 years ago. Prior to this opening to foreign investment, Arab capital markets imposed several restrictions on foreign investors. It is worth mentioning that during the financial crisis, international hot money was widely blamed for having stimulated the sharp correction on Arab markets.
Let us compare the Gulf financial markets to a human teenager. The teenage years of life are the best period to grow, but still a fragile one. We have raised our child in a protected home, covered him warmly and sealed the windows and doors shut. We have preserved him from all kinds of bacteria and barely allowed him to play with his close relatives, isolating him from the external climate changes. Can you imagine if we suddenly opened widely our doors and windows, allowing visitors to come inside? If we allowed our child to face brutal external winds without giving him the chance to progressively acquire a natural immunity? Then, like hot money, we will blame the wind for having existed, blame the visitors for not being aware of our customs and manners before entering our home, and blame the bad guys for having played dangerously with our child. In other words, rather than blaming outside influences on market setbacks, it is key that these markets already have a steady foundation that is able to adapt to these setbacks while still maintaining long-term sustainability.
Sustainability has two main requirements. One is internal, by ensuring that Arab capital market authorities accommodate the needs of their local and regional investors. Attracting international investors should not put the local and regional capital markets at risk. The next is external, by cultivating a market that is attractive to international investors as well.
Personally, I believe that the Arab markets cannot know a long-term development by being restricted and isolated from the international markets. Their opening is a must that will provide plenty of benefits. We must consider the effects of each and every new procedure taken on our markets in order to not only maximize its pros and minimize its cons, but also to accept the consequences of our choices in the future. It is important to follow a guideline that will gradually change the direction of our markets; to ensure that they are attractive to foreign investment. This involves several baseline requirements.
The nature and duration of international investments depend on factors such as the law, and geopolitical condition of the region, for example. Arab countries must create a financial environment that is both stable and predictable to an international investor. After evaluating the rules and regulations set in place, the investor becomes vulnerable to any changes in the laws and conditions in the host country. This is why the nature, structure and purposes of foreign investment law are sensitive and distinct in comparison to other laws.
Markets must meet international requirements and needs such as applying the International Accounting Standards, offering trustable rating agencies services as well as high level of analysts’ reports, and specially complying with the full disclosure standards. Overall, any information that may significantly impact the price of stocks or the decision-making of investors must be truthful, accurate, complete, and disclosed in a timely manner.
Further, the Arab markets must improve their liquidity by giving the market makers facilities and incentives, and by allowing short positions as well as the securities landing. They must also make international investors confident in their market by offering well-developed hedging possibilities via derivatives and future contracts.
The international investor will not be confident if there is not enough liquidity to exit the market or if he might not be able to protect his positions during retracements or crises.
Overall, by applying the international rules of corporate governance, Arab markets will no doubt comfort and help protect both international and regional investors. This will create a foundation that will allow our markets to acquire the immunity to face the hectic international environment headstrong.
I am sure that time will tell us that a wise opening of the Arab markets will draw a success story for the Arab region. Until then, we have full trust that the Arab Capital Market Authorities are caring enough to put the train on the right track through their wise rules and regulations.