MENA Capital Markets as a “Smart” Investment Opportunity

[On October 19, 2015, I  attended the 2015 C3 US-Arab Business Summit in New York City. The following is summary of a panel on finance. The affiliations of the speakers are for identification only and they were not speaking on behalf of their respective institutions. In any case, this is a report only of my subjective impressions of the panel and is not intended as an exact transcript. Any errors are mine alone. ]

MENA Capital Markets as a “Smart” Investment Opportunity

Robert Michael (New York City Bar Association). I wrote the first Islamic loan notes by substituting the word “commission” for “interest.” Yusuf de Lorenzo calls me the godfather of Islamic finance. Three principles of Islamic investment are no interest, no unquantified risk, and no financing of prohibited activities. Seeking profit as long as it does not involve harming others (socially responsible investing) is permitted.  Sukūk are incorrectly called Islamic corporate bonds, but unlike corporate bonds they are secured.

Ken Dorph (Sag Harbor Consulting). What we think of as modern finance came from trade between Egypt and Venice. In the 1940s the Egyptian stock market was one of the largest in the world. The birth of modern Israel, the rise of socialism in the Arab world, and the US refusal to finance the Aswan dam led to the rise of nationalization of finance in the Arab world and one of the worst records of finance in the world. Islamic finance should lead to a move away from bad debt, but it hasn’t. There is reform, but it is slower than in Asia or Europe. The emergence of Islamic finance has complicated matters. Its frequency is badly underestimated. The Arab Spring has caused disasters as well as opportunities. Reform of state banks has gone nowhere. Iraq could be an opportunity especially if the IS were to be pushed back. Syrians are natural business people but now all we can do is pray for peace. Much of the business community is Palestinian. Palestine has a stock exchange but it is hard to have an independent financial sector without an independent country. The UAE has a dynamic financial sector. Things are down now because of oil prices, but I remain bullish long term. Saudi is the sector I know the best. In the 70s when the bans were nationalized in the Arab world the Saudis wisely allowed foreign banks to continue operations, and they have  benefited from it. Foreign indirect ownership is now allowed. With the emergence of ETFs etc there is hope that Saudi’s non-royal economy will continue to grow. Libya after the revolution is not as vicious as Iraq as the violence there is of the “Hatfield-McCoy” variety, but I will be optimistic once they put down their guns. In Tunisia they have mandated the state banks operate like private banks. Rather than privatize state banks we ought to commercialize them. I think Tunisia is undervalued.

Paul S. Homsy (Eaton & Van Winkle). Saudi Arabia has changed its investment rules allow direct foreign investment in their stock market which is the largest exchange in the Middle East. Most of the market is banks, construction companies, and insurance companies. They have been open to foreign investors in privately owned companies for fifteen years with only a few exceptions (mineral mining and insurance), They hope Saud Arabia will be part of the MSCI index. CMA is the Saudi’s SEC. A local Saudi company (AAP) licensed by the CMA must file the application of any foreign company which puts them on a fast track, and if you have not heard within thirty days you are approved. Foreigners can’t own more than 49% of a local company. Any single QFI (Qualified Foreign Investor) is limited to 20% ownership of a particular company or 10% of market value (this is ambiguous).

John P. Desrocher  (US Dept. of State). This administration developed a new model of bilateral investment treaties in 2012. Issues that obstruct investment include local content requirements, limits on taking funds out of country, etc.  Such treaties help to level the playing field. A positive list treaty applies only to specified sectors of the economy while a negative list applies to everything except a negative list (e.g., media).

Karim Babay (Intrinsic value Investment Partners). We were founded to invest primarily in North America but after the Arab Spring we are making significant investments in the MENA region.  It’s an economy comparable in size to Italy’s but while Italy’s is declining MENA is growing. The population is growing at 2.2%. The other factor is productivity, which is very low and we anticipate a growth rate of 5%. It is a (un?)leveraged market. Debt to GDO is less that 12%. Libya is at 4%. Tunisia at close to 50% is still better than the US or Japan.  The markets are illiquid, which is bad, but an opportunity. Hedging capacity is limited at present. We have generated a return above 12% since formation. Undervalued companies tend to remain undervalued because of investment barriers. We anticipate institutionalization of the markets in the future which will increase value. We anticipate positive structural changes. Oil prices are likely to rise. Governments are likely to withstand changes in dollar value. The region is systematically sound, notwithstanding the headlines.

Robert Michael. Outside the US it is very difficult to buy on consumer credit. To the extent that laws are reformed in this region that will change.

Paul Homsey. The Saudis know they have to get people out of the public sector and into the private sector and they know small business is the way to do that.

Imad-ad-Dean Ahmad, Ph.D.
Minaret of Freedom Institute

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