Capital is the cornerstone of the free market economy
One of the hallmarks of the oil-era development model of the Gulf countries after WWII was the importance of public sector investment in the engine of economic progress. It was almost inevitable. The government was the main recipient of oil revenues and the chief executor of economic strategies.
However, the undisputed prominence of state-funded investments has evolved in recent years as policymakers across the region have committed to consolidating public finances while seeking to stimulate alternative mechanisms of pooling and funding. capital allocation.
Saudi Arabia has been one of the most proactive regional economies in this regard. It is home to the largest and most diverse stock market in the region, and various new vehicles, whether under the auspices of the Public Investment Fund or other entities, have been set up to drive targeted thematic investments. .
These changes are both welcome and necessary. Capital is the cornerstone of the free market economy.
Development requires its efficient pooling and distribution. Over three decades ago, in 1988, Henry Azzam published a book “The Gulf Economies in Transition” in which he described the adjustment of countries in the region to the realities of falling oil prices.
One of his main areas of interest was the importance of attracting non-sovereign sources of capital for development.
He produced a cautious assessment of current realities: âTo attract private capital into the development process, one or more more sophisticated financial markets must be developed, including the creation of new financial intermediaries, new investment instruments, efficient public stock markets, investment funds and venture capital firms.
Much progress has materialized since Azzam’s verdict. Not only did Saudi banks regroup and grow successfully in the last decades of the 20th century and beyond, but the new millennium has also seen rapid development in the capital and insurance markets. Tadawul’s rise to an exchange of global significance is a major achievement.
The bond markets have reached a significant maturity, in particular thanks to significant sovereign issues. The standardized sukuk structures have greatly contributed to the process. In recent years, new types of fundraising vehicles have gained ground, be they REITs or funds formed with the participation of the public sector. The Shareek program is an innovative way for the government to facilitate greater private sector participation in development finance.
But the financial markets are no more stationary than the economy as a whole. As the Gulf economies pursue the goals set out in Saudi Vision 2030 and other comparable roadmaps, the growth and diversification of the financial sector is only growing in urgency and importance. In many areas, even more proactive reforms are needed to achieve these ambitions.
For example, the International Monetary Fund examining the Gulf financial markets in 2018 has consistently found that âinstitutionalization … is taking place in the financial sector in many ways as a result of economic growth, rather than as a precursor or foundation for economic growth. “. Namely, more prosperous economies create demand for new financing needs while the role of financial market development in driving economic change is diminished.
It is encouraging that the GCC regional financial sector is well positioned to do more. Regional banks are well capitalized and recent consolidation has strengthened balance sheets. The question is how to take advantage of this progress to allow more lending to ânewâ businesses, especially SMEs, to ensure that their growth potential is not constrained by limited access to credit.
Gulf stock exchanges have started to see more IPOs, but there is an opportunity to push more private companies and innovative finance vehicles to join their numbers, including creating more successful ‘exits’ for startups. .
Large companies are reaping the rewards of the fixed income markets, but deeper and more diverse local currency issuance is needed to extend their reach further up the value chain.
Private equity has clear potential – and economic healing power – given the number of disruptions created by the economic challenges of recent years, not to mention the structural opportunity to create more productive businesses. The imposition of value added tax and other changes create a more solid basis for valuations. But the private equity industry remains small.
Finally, there is a tremendous opportunity to boost the universe of institutional investors by stimulating the development of collective savings vehicles. Pension funds, insurers and mutual funds dominate the capital markets in the West.
Progressive measures to diversify pension systems and stimulate the growth of insurance and personal savings can help their progress also in the Gulf.
They are entities driven by fiduciary duty and have proven to be powerful tools for diversifying financial markets and effectively raising capital.
- Jarmo Kotilaine is an economist and strategist specializing in the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.
Disclaimer: The opinions expressed by the authors of this section are their own and do not necessarily reflect the views of Arab News