Gulf markets: No need to panic, warns governor

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By:
Sudip Roy
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BMA chief confident about region’s fundamentals.

Rasheed Mohammed Al Maraj, governor of the Bahrain Monetary Agency“I wouldn’t advocate my government intervening in the market. You can’t use public funds to rescue the markets.”
Rasheed Mohammed Al Maraj
The Gulf’s economic fundamentals remain strong despite continued pressure on the region’s stock markets, according to a leading local policymaker.

Rasheed Mohammed Al Maraj, governor of the Bahrain Monetary Agency, says that the region has undertaken substantial reform in recent years and this should stand it in good stead in the face of collapsing share prices on a number of local bourses.

Al Maraj says that the sell-off in the equity markets that began in March and has continued fiercely in some countries, most notably Saudi Arabia, was expected and was long overdue. “The valuation levels in most of the region’s markets were not realistic,” he says.

However, Al Maraj reckons the region’s underlying story remains favourable and that opportunities will arise for private investors. He says that economic reform, rather than the high oil price, is the most important reason for the region’s strong fundamentals. “People always put an emphasis on the high oil prices as part of the favourable outlook. I disagree,” he says. “Economic liberalization and the realization that there should be more involvement from the private sector are underpinning the strong economic fundamentals.”

He accepts that the region’s equity markets are still relatively immature but believes that governments are taking measures to improve the situation. One problem is the lack of supply, which has created an artificially high demand for those companies that have gone public. But Al Maraj expects more privatizations out of the region, which should bring more depth to the market. In Bahrain, for example, the government has already embarked on a wide-ranging privatization programme, with companies sold in the telecoms, meat-processing and public transport services. Other leading industries in line for privatization include power and water utilities and ports.

Bahrain’s stock market has not fared as badly as some others in the region and is down less than 5% year to date. “Our valuations are reasonable,” says Al Maraj. “They are substantially better than elsewhere in the Gulf.”

One thing Al Maraj is adamant about is that governments should not intervene to prop up ailing markets. “I wouldn’t advocate my government intervening in the market,” he says. “You can’t use public funds to rescue the markets.”

The governor is confident that Bahrain will retain its position as the finance capital of the region despite financial centres opening in Dubai and Qatar in the past 18 months. Saudi Arabia has also announced that it is considering establishing one. “We think we have created a track record, a system that has been tested over a number of years and has come through crises,” he says.

“I’m not saying that we’re not concerned about the competition but we’re confident about what we do,” he adds. “We’ve established our credentials and will take measures to improve in the areas where we need to.” More than 350 local, regional and international financial institutions are present in Manama. The kingdom is headquarters for regional banks such as Investcorp, Arab Banking Corporation and Gulf International Bank. Whether Bahrain retains these banks’ business remains to be seen but Al Maraj is optimistic. “Regional players choose to come to Bahrain because of Bahrain’s reputation,” he says.

Moreover the kingdom, principally through the BMA, has been at the forefront of product innovation in the region, especially in areas such as Islamic banking, fund management and insurance. “The Islamic banking industry wouldn’t be at this level of sophistication and size internationally without the BMA’s initiatives,” says Al Maraj. Today Bahrain is the leading Islamic financial centre in the Middle East, with 26 local, regional and global banks; five insurance companies; and 34 Islamic mutual funds. The country was the first to develop and issue prudential regulations for Islamic banks.

However, the governor acknowledges that Islamic finance needs to develop more products. “They won’t come easily because they have to be Shariah compliant,” he says. “Research and development is key.” One product scholars are working on now is a Shariah-compliant repo.