Business | Opinion
Action needed to restore confidence in bourses
I send this article from Kuwait on the back of my participation in a gathering convened to fight financial wrongdoing.
- Dr Jasim Ali, Special to Gulf News
- Published: 23:27 November 22, 2008
I send this article from Kuwait on the back of my participation in a gathering convened to fight financial wrongdoing.
Originally, I wanted to write about the outcome of the third Global Conference of Parliamentarians Against Corruption. However, I changed the subject after the Kuwaiti cabinet agreed to set up a special fund designed to help restore confidence to the Kuwait Stock Exchange (KSE).
The step was based on the recommendation of a team mandated to propose steps to help the country overcome the adverse effects of on-going global financial crisis. In particular, the authorities called on Kuwait Investment Authority (KIA) to set up a long-term investment portfolio in co-operation with other government institutions to invest at KSE. KIA serves as the country's investment arm or state wealth fund (SWF). By one account, KIA controls some $250 billion (Dh918 billion), making it the third largest SWF of the Gulf Cooperation Council (GCC) after the UAE and Saudi Arabia.
The rescue package is unique in many respects. The fund is long-term in nature and intended to remain in the bourse for five years. Yet, KIA and other governmental institutions have right to change the asset portfolio within the specified period. In addition, the authorities correctly elected to include other institutions such as pensions in the fund in order to avoid providing investors with hints about investment moves. Now, KIA owns stakes at numerous firms listed at KSE.
Still, the fund serves as a market maker, a move that should help restore confidence in the stock market. To be sure, KSE has dropped by more than 30 per cent since the start of 2008. In other words, it is fair to treat the fund as part of a set of confidence building measures. The bourse suffers from a general loss of confidence notwithstanding relatively strong fundamentals.
Monetary value
For instance, some 186 firms listed at KSE reported net income of $11.1 billion in the first nine months of the year. The figure is down by 19.3 per cent compared to the same period in 2007. But many listed firms remain profitable.
The monetary value of the official fund was not readily available at the time of writing this article. Yet, many investors believed that the figure would be around $11 billion. The figure is sizable by virtue of representing about 8 per cent of market capitalisation of firms listed on the bourse.
Fellow GCC states should consider emulating the Kuwaiti experiment to help bringing back confidence to their stock markets. Failure to act swiftly would only increase the recovery cost. GCC states need to learn from the experience of the US, which failed to respond swiftly in the summer of 2007 to signs of sub-prime market trouble. Eventually, the Bush Administration had to win Congressional approval in October for a $700 billion rescue package. This figure amounts to about 80 per cent the size of gross domestic product (GDP) of the six-nation GCC.
GCC governments have the resources to act and help contain downward pressures on stock prices by becoming market makers. By one estimate, GCC states together have $1.5 trillion in the form of SWF. The UAE stands out by virtue of accumulating an extraordinary $875 billion. Saudi Arabia follows suit with $300 billion.
Undoubtedly, stock market performance reflects a country's economic wellbeing. Time is ripe for other GCC governments to acquire local assets in order to restore confidence in the economic sectors represented at the stock markets. The Kuwaiti experiment should serve as a guide to other GCC authorities.
- The writer is a Member of Parliament in Bahrain
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