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GCC markets not immune from global shocks: IMF

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http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=456141&version=1&template_id=48&parent_id=28


GCC markets not immune from global shocks: IMF


By Santhosh V Perumal/Business Reporter


Thursday1/9/2011September, 2011, 10:56 PM Doha Time

Equity markets in the GCC (Gulf Cooperation Council) region were “significantly” affected by the spillovers from the US and regional markets, regardless of the degree of foreign participation, according to an International Monetary Fund (IMF) working paper.
“The conditional covariance between these markets and the S&P (Standard & Poor) 500 illustrate contagion, i.e. turbulence peaked by producing shifts in the transmission of volatility during the recent global financial crisis around the time of the collapse of Lehman Brothers in fall 2008,” according to an IMF working paper authored by Tahsin Saadi Sedik and Oral H Williams.
The findings underscore the fact that the GCC equity markets are not immune from global financial shocks such as the sub-prime financial crisis. They also refute the notion of decoupling between the GCC equity and global equity markets.
“The impact of regional spillovers to local equity markets was also significant and point to the need for cross-border co-ordination and supervision to minimise the adverse spillover effects,” said the paper titled ‘Global and Regional Spillovers to GCC Equity Markets’.
It found that spillovers from regional equity markets were also important but the magnitude of the effects was on average smaller than that from mature markets.
“In particular, diversifying the sources of financing the real economic would increase the resilience of banks balance sheets by limiting their exposure to the various types of risks,” the paper said, adding further deepening of asset markets would give firms alternative means of financing investment.
The GCC economies are highly integrated into the global economy through trade and financial sector channels, it said, adding oil - the main export commodity - accounts for over 75% of export receipts and about 85% of fiscal revenues.
Globally, these economies are important as net creditors through the recycling of petrodollars and they play an important role in oil and gas markets. They account for 40% and 23% of proven oil and gas reserves respectively. They also possess over 70% of Opec’s spare crude capacity, thus exercising an important role in stabilising oil prices in the short run, it said.
While market capitalisation to gross domestic product of GCC equity markets are comparable to those of the emerging markets, they vary considerably in the degree of foreign participation with the UAE having the highest degree of foreign participation and Saudi Arabia the least, according to the paper.
Market characteristics such as limited breadth, lack of hedging instruments, regulatory restrictions on access, and exclusion from emerging market indices have stymied the degree of participation by foreign institutions, the report said.
Foreign participation in listed companies is capped at 70% in Oman, 49% in the UAE and Kuwait, 25% in Qatar, while Saudi Arabia permits foreign participation through mutual funds or swap arrangements, the paper said.
The volume of shares traded in the GCC markets has soared during the boom years from about $300bn in 2003, to a peak of $1.7tn in 2006, when most markets experienced a bubble associated with the oil boom but have since levelled off at $682bn at end-2009.
Banks tend to dominate equity markets ranging from 25% of market capitalisation in Dubai to a high of 40% in Qatar, thus having a strong bearing on the performance of the overall index. Despite the increasing number of listed companies, the market is concentrated and it is dominated by the banking sector.
Banking sector performance is also strongly correlated with oil shocks which is an important source of volatility and is transmitted via macro variables, it said.

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