Business | Opinion
Local stock markets need to attract foreign investments
There are points that need to be tackled to turn the markets into an effective contributor to the development process.
- By Dr Mohammad Al Asoomi, Special to Gulf News
- Published: 00:33 May 15, 2008
Gulf stock market have been negatively affected by the sharp declines in global financial markets since the beginning of this year.
GCC stock markets had become a safe haven for foreign investments due to many reasons, the most important of which are the good financial results of the gulf joint-stock companies, unlike their US and European counterparts, which suffered huge losses in the first quarter of this year.
In addition, oil prices increased to reach a record price of above $125 per barrel, which increased optimism that gulf economies will continue to achieve high growth rates during this year.
Financial markets in the region are still incapable of attracting foreign investments, which are particularly important for modern economies, despite the good financial results of most gulf companies listed on stock markets.
As a result, these markets are unable to utilise the positive developments in the local economies and take advantage of the investment opportunities offered by joint-stock companies and activate their developing role.
There are may factors behind the inability of stock markets to attract foreign investments, the first of which is the slow development of the legislative and legal structures of Gulf bourses, which are still suffering from a huge insufficiency.
This factor affects foreign investors, who are aware of legislations governing global stock markets, but lack knowledge of gulf stock markets.
The second factor is the huge restrictions imposed on foreign investments in gulf bourses, where even GCC citizens suffer from when trading in other GCC stock markets, despite the implementation of the Gulf Common Market since the beginning of 2008.
The lack of transparency is another factor that hinders foreign investments. For instance, the first quarter's financial results were leaked before they were officially announced.
Leak
Share prices of some companies increased noticeably before the announcement and declined after the announcement was made, which indicates a leak of the results. Such a leak is costly for investors, who suffer losses due to their perceptions based on the announced results.
Such an environment can never be attractive for foreign investors, and will have strongly negative impacts on bourses and even on those who leak the results.
Another result of the leakage is undermining public trust in financial markets, which will see a sharp fall similar to the one suffered in 2005 when GCC stock market indexes reached unprecedented levels, nearly double what they are at present.
The previous three factors apply to all GCC stock markets in varying degrees according to the maturity and experience of these markets. There are common points that need to be tackled to turn the markets into an effective contributor to the development process.
This can be done by updating and developing the laws regulating GCC financial markets by benefiting from the laws of European and Asian bourses, which protect the rights and interests of investors.
Rapid growth rates in GCC countries require the swift development of all local economic sectors, including financial markets, to ensure the effective contribution of these sectors to attracting more investments and establishing more companies.
This will lead to benefiting from the current oil boom to diversify sources of income and increase the contrition of non-oil sectors to the gross domestic production.
The writer is a UAE economic expert.
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