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29 Mar 2013

Middle East seeks capital gains

Georges Elhedery

by Georges Elhedery

Head of Global Banking and Markets, Middle East and North Africa, HSBC

Middle East seeks capital gains (Getty Images/Buena Vista Images)

The Middle East and North Africa must integrate into global investment flows

The world has become a more uncertain place to do business. For emerging economies such as those in the Middle East and North Africa (MENA), continuing growth is vital.

Diversifying the region's economies away from oil dependency is important over the longer term. It requires putting in place foundations for a dynamic private sector to flourish, which can generate enough jobs for the region's young and rapidly growing population.

The MENA region consists of more than 20 countries with a population of more than 400 million people. Combined, its GDP is close to USD3 trillion, about 4 per cent of total global output. This is forecast to rise to 5 per cent by 2050, making it the world's third most productive region behind China and India.

Young populations and growing savings will drive the development of the financial services sector

But non-oil exports combined account for just USD365 billion, about the same as the exports of Belgium, according to the International Monetary Fund. Belgium is a country of just 11 million people.

This illustrates why MENA must integrate into global investment flows. A stronger emphasis on trade is already happening. Bilateral trade between China and the United Arab Emirates (UAE) has grown from USD50 million to USD35 billion over the past three decades, or 35 per cent a year.

The region's capital markets – still considered frontier by many investors – have a critical role to play in supporting this economic rebalancing. As Europe's recent experience shows, financial systems overly reliant on a single funding channel can quickly find themselves at the mercy of events such as bank deleveraging. Companies with easy access to bond markets are enjoying more reliable and cheaper sources of funding.

Building closer relationships with China is also essential particularly since the renminbi is developing as an important currency for trade. The UAE is becoming one of the leading beneficiaries of China's growth.

It is expected that China will become only the second country in the UAE's trade history to cross the headline figure of AED100 billion (USD27 billion). Just as significantly, almost 60 per cent of China's total trade with the UAE is then re-exported.

Development of the region's equity capital markets is crucial. Last month NASDAQ Dubai established an advisory group for a proposed new market for small and medium-sized enterprises (SMEs). It is expected to be implemented this year, and will help some of the SMEs in the Middle East, of which there are between 9 million and 11 million, gain access to the capital they need to grow.

The initiative is not intended to replace the strategy of attracting international companies and institutional investors, but instead establish a "junior market" similar to London's Alternative Investment Market.

This forward thinking demonstrates a desire to use capital markets as the mechanism for the next phase of regional growth, and to tap growing pools of capital in the region. According to the latest data, total savings and investments domiciled in MENA increased by 3 per cent in the first half of 2012 to USD89.6 billion. But there is still much to be done.

Long-term GDP growth forecasts suggest that by 2050, 19 of the top 30 economies will be from what we currently call "emerging markets". If this is accurate, this will drive substantial changes to the size and composition of global equity markets.

Young populations and growing savings will drive the development of the financial services sector in these markets. Some analysts believe that China could overtake the US as the world's biggest equity market by 2030. Capital market development is an integral part of financial development, which is, in turn, associated with economic growth. In the long term MENA nations must seek to extend their role in supporting trade and investment between emerging and developed markets.

For MENA, the challenge is to use the region's high savings to allocate capital to generate productive and broad-based growth. This will generate the jobs for the region's young and rapidly growing population.

Georges Elhedery spoke about the region's capital markets on 27 March 2013, at the Middle East CFO Alliance in Dubai.

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