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What we propose to cover

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

  2. 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

  3. The recent development of MENA securities markets

  4. MENA stock exchanges, 2001-2007

  5. MENA Value Traded and Turnover Ratios,2001-2007

  6. High Income OECD Exchanges, 2001-2007

  7. Turnover Ratios, 2007 (%)

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

  9. Market Cap. & Value Traded in Selected MENA Exchanges

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

  11. The flow of investment funds: the basic story HOUSEHOLD SAVINGS Investment FIRMS

  12. The flow of investment funds: enter the banks HOUSEHOLD SAVINGS Deposits BANKS Loans FIRMS

  13. The flow of investment funds:with advisers and markets HOUSEHOLD SAVINGS Financial advisers Pension funds Insurance companies Mutual funds Banks Securities markets FIRMS

  14. 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)

  15. 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

  16. Pensions: the Three Pillars Moving from a ‘Pay as You Go’ system toa funded system PILLAR 1 State pension PILLAR 2 Mandatory pension PILLAR 3 Voluntary pension

  17. 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)

  18. (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)

  19. Privatization Public Offers in Hungary,1994-1998

  20. The more you sell, the more you get – the privatization of MOL, Hungary, 1995-1997 Source: OPM research

  21. 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

  22. What causes financial crises?

  23. 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.

  24. 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

  25. 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

  26. 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

  27. 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

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

  29. Until recently, emerging markets have been relatively much less volatile … Source: IMF, Global Financial Stability Report, October 2008

  30. … but they are beginning to be seen as more risky than they were … Source: IMF, Global Financial Stability Report, October 2008

  31. … so global flows to emerging markets are falling … Source: IMF, Global Financial Stability Report, October 2008

  32. This could be good news or bad news Source: IMF, Global Financial Stability Report, October 2008

  33. Opportunities for MENA securities markets

  34. 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

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

  36. 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)

  37. 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

  38. 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.

  39. 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)

  40. 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.

  41. 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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