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Session: Emerging Capital Markets, a Look Forward Paper: Future Opportunities for Emerging Markets in MENA countries Presenter: Dr Robert Stone, Oxford Policy Management. What we propose to cover. The recent development of MENA securities markets

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What we propose to cover

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What we propose to cover

Session: Emerging Capital Markets, a Look ForwardPaper:Future Opportunities for Emerging Markets in MENA countriesPresenter: Dr Robert Stone,Oxford Policy Management


What we propose to cover

What we propose to cover

  • The recent development of MENA securities markets

  • What is required for a securities market to take off into growth?

  • What causes financial crises?

  • Implications of the present crisis for emerging markets

  • Opportunities for MENA securities markets


What we propose to cover

The recent development

of MENA securities markets


Mena stock exchanges 2001 2007

MENA stock exchanges, 2001-2007


Mena value traded and turnover ratios 2001 2007

MENA Value Traded and Turnover Ratios,2001-2007


High income oecd exchanges 2001 2007

High Income OECD Exchanges, 2001-2007


Turnover ratios 2007

Turnover Ratios, 2007 (%)


Market capitalization of selected mena exchanges 2007 us bn

Market Capitalization of selected MENA Exchanges, 2007 (US$bn)


Market cap value traded in selected mena exchanges

Market Cap. & Value Traded in Selected MENA Exchanges


What we propose to cover

What is required for a securities market to take off into growth?


The flow of investment funds the basic story

The flow of investment funds: the basic story

HOUSEHOLD SAVINGS

Investment

FIRMS


The flow of investment funds enter the banks

The flow of investment funds: enter the banks

HOUSEHOLD SAVINGS

Deposits

BANKS

Loans

FIRMS


The flow of investment funds with advisers and markets

The flow of investment funds:with advisers and markets

HOUSEHOLD SAVINGS

Financial advisers

Pension funds

Insurance companies

Mutual funds

Banks

Securities markets

FIRMS


The system behaves like a system

The system behaves like a system!

  • An increase in contractual savings leads to a growth in the stock and bond markets

  • The impact is greater where corporate information is more transparent

  • The impact is greater where:

    • the financial system is market based

    • pension fund contributions are mandatory

    • international transactions in securities are lower

See G. Impavidom A.R, Musalem and T. Tressel, ‘The Impact of Contractual Savings institutions on Securities Markets’ (World Bank PRWP No, 2948, 2003)


The nbfis are systematically linked

The NBFIs are systematically linked

  • The contractual savings institutions (pension funds and life insurance companies) need the securities market – they must be able to select assets with varying risks.

  • The securities markets need the contractual savings institutions – they must have institutional investors


Pensions the three pillars

Pensions: the Three Pillars

Moving from a ‘Pay as You Go’ system toa funded system

PILLAR 1State pension

PILLAR 2Mandatory pension

PILLAR 3Voluntary pension


Chile financial savings by institutional investors of gdp

insurance companies

100

mutual funds

80

60

40

20

pension funds

0

1994

1995

1996

1997

1998

1999

2000

2001

Chile: financial savings by institutional investors (% of GDP)

Source: D. Linneberg, ‘The Future of Capital Markets in Developing Countries.’ (Brookings-WB-IMF FMD conference, 2003)


Chile deepening the domestic corporate bond market us billion

(Issuance)

(total outstanding)

7

3,0

6

2,5

issuance

5

2,0

4

1,5

3

1,0

2

outstanding

0,5

1

0

0,0

1994

1995

1996

1997

1998

1999

2000

2001

Chile: deepening the domestic corporate bond market (US$ billion)

Source: D. Linneberg, ‘The Future of Capital Markets in Developing Countries.’ (Brookings-WB-IMF FMD conference, 2003)


Privatization public offers in hungary 1994 1998

Privatization Public Offers in Hungary,1994-1998


The more you sell the more you get the privatization of mol hungary 1995 1997

The more you sell, the more you get – the privatization of MOL, Hungary, 1995-1997

Source: OPM research


The privatisation of jordan telecom

The privatisation of Jordan Telecom

  • 40% sold to France Telecom in 2000 for $508m

  • Investment of $500m in upgrading systems

  • 10.5% sold by Government in public offer in October 2002

  • Proceeds were $86.2m

  • 90% of the offer was subscribed by Jordanian investors …

  • … including 33% ($28m) by Jordanian retailinvestors


What we propose to cover

What causes financial crises?


This is not a new phenomenon

This is not a new phenomenon!

Charles Mackay in 1852, Extraordinary Popular Delusions and the Madness of Crowds: –

  • Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. …

  • Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.


Recent crises

Recent crises

Financial crises inevitably cause major set backs to “financial development” in any country). They are also regular occurrences in both rich and poor countries

  • sub-prime plus Northern Rock plus Bear Stearns plus private equity/hedge funds in the rich countries in rich countries 2007/8 and the second wave of failures in September/October 2008

  • LTCM (1998), the Savings & Loan crisis in 1980s and many others before that in USA and in the rich West and East

  • in the Emerging Market Economies, Mexico, Russia, Thailand, Korea, Indonesia, Turkey, Russia, Argentina – all since 1990

  • in other developing countries, many examples – a total of 112 examples in 93 countries in 1970-2000 with another 51 incipient crises


Causes versus the pathology of crises

Causes versus the Pathology of Crises

Proposition: there are a number of different causal factors but a broad similarity in how any initial spark of crisis can becomes an inferno.

Five Elements to the pathology:

  • Increases in interest rates / tighter liquidity

  • Increases in general uncertainty

  • Asset market effects (negative) on balance sheets of both companies and banks

  • Intensified informational Problems for lenders

    and possibly

  • Bank runs and panics


The sequence of events in a financial crisis

The sequence of events in a financial crisis

Based on Frederick S Mishkin, “Understanding Financial Crises: A Developing Country Perspective,” NBER Working Paper No. W5600, May 1996


The sub prime example

The Sub-Prime Example

Many of the previous financial crises have been LIQUIDITY crises – and have been correctible by plugging in lots of new Central Bank money (e.g. LTCM in 1996) or new international loans (Mexico in 1994). But not all.

Today’s crisis also involves significant INSOLVENCYelements. For example:

  • several 100 thousands of sub-prime and near sub-prime borrowers in USA

  • an increasing number of mortgage lenders and not merely the main specialist sub-prime lenders

  • many home builders as order falls and cancellation rates increase

  • many hedge-funds and other lenders who hold the securities (especially Collateralized Debt Obligations (CDOs) created from the original sub-prime loans

  • some non-financial companies as the retreat of the hedge funds (a non-traditional source of capital and liquidity) causes bond yields to rise and availability of funds to decline relative to recent levels

  • somebanks( starting with Northern Rock & Bear Stearns) whose business models have been built on the assumed availability of relatively cheap and liquid funds from other financial institutions. Mark to market is a stern


What we propose to cover

Implications of the present crisis for emerging markets: news from the IMF


Until recently emerging markets have been relatively much less volatile

Until recently, emerging markets have been relatively much less volatile …

Source: IMF, Global Financial Stability Report, October 2008


But they are beginning to be seen as more risky than they were

… but they are beginning to be seen as more risky than they were …

Source: IMF, Global Financial Stability Report, October 2008


So global flows to emerging markets are falling

… so global flows to emerging markets are falling …

Source: IMF, Global Financial Stability Report, October 2008


This could be good news or bad news

This could be good news or bad news

Source: IMF, Global Financial Stability Report, October 2008


What we propose to cover

Opportunities for MENA securities markets


Summary of key lessons

Summary of key lessons

  • You can’t rely mainly on foreign capital to build the securities market

    • It’s more volatile than domestic capital, partly because

    • It’s more subject to extraneous disruptions.

    • In any case, even to the extent that we want foreign capital, you need a strong domestic market to attract it

  • To build the domestic securities market, you need

    • More liquidity, which means

    • More domestic institutional investors and

    • More firms listing and raising capital on the market


There is plenty of room for mena domestic securities markets to grow

There is plenty of room for MENA domestic securities markets to grow


Meanwhile some general principles to recap

Meanwhile, some general principles – to recap:

  • Preconditions for contractual savings development, and indeed development in general appear to be:

    • A hard core of sound banks and insurance companies

    • A long term government commitment to financial sector reform and sound macroeconomic policies

    • A long-term commitment to the creation of a sound regulatory and supervisory framework

From: G. Impavidom A.R, Musalem and D. Vittas, ‘Contractual Savings in Countries with a Small Financial Sector (World Bank, 2002)


Specific factors in meca markets

Specific factors in MECA markets

  • Specific factors impacting on stock market development in the Middle East and Central Asia include

    • -The quality of institutions

    • -Remittances and

    • -Natural resources

  • Does this also apply to North Africa?

See Andreas Billmeier and Isabella Massa, “What Drives Stock Market Development in the Middle East and Central Asia – Institutions, Remittances or Natural Resources?” IMF Working Paper WP/07/157, July 2007


Requirements that the market cannot control

Requirements that the market cannot control

  • The establishment of macroeconomic stability

  • The evolution of a funded pension system which and insurance companies as institutional investors in the market.

  • Where there are substantial enterprises owned by the state (e.g. banks, telecommunications, minerals), the floating of such enterprise on the stock exchange through a public offering of some of their shares.

  • The passing and implementation of sound securities and related laws and the establishment of efficient regulators to implement them – again as a means of reducing systemic risk.

  • The development of a liquid and transparent market in government securities, which established the risk-free rate of return as the benchmark for corporate securities.

  • The removal of fiscal disincentives for investment in shares and bonds.


Sequencing the hierarchy of markets

Sequencing: the hierarchy of markets

Derivatives markets

Stock Markets

Banks

Source: V. Sundarararjan, ‘Financial Market Development: Sequencing of Reforms to Ensure Stability.’ (Brookings-WB-IMF FMD conference, 2003)


What is required of the markets

What is required of the markets

  • for brokers to shift some of their focus from trading to origination – they need to become corporate financiers, not just dealers;

  • for stock exchanges to ensure appropriate listing rules and for bonds and equities, rules which minimise delays and excessive regulation while ensuring transparency;

  • for adequate supporting infrastructure to be developed, e.g. trading platforms, clearing & settlement, depositories, etc

  • for insurance companies and mutual funds to work with the exchanges and brokers to ensure favourable conditions for underwriting new issues and large scale trading.


What we propose to cover

Capital Market Forum thanks you for taking the time to go through this presentation with us

For further information please visit our website

www.p-s-e.com /forum


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