Stock markets allow corporations to access new sources of capital and investors to benefit from potentially higher returns compared to other investments, such as bonds or real estate, and a stream of dividends. Stock markets were first established in the Gulf in the mid-1980s but were slow to take hold. Despite some improvements, Gulf markets lacked transparency and, in many cases, were dominated by large government-related companies. As a result, international fund managers steered clear of the region’s stock markets for many years. However, recent key reforms have led to a surge in market capitalization in Gulf states, in contrast to global trends.
The Role of Stock Markets in Financial and Economic Development
Issuing common shares on the stock market allows listed companies to raise capital without incurring too much debt or the obligation to repay acquired funds later. In addition, companies can repurchase some or all of their outstanding shares when they no longer need equity capital. Meanwhile, investors who purchase shares expect them to get better yields than bank deposits, for example, and it is easy to exit by selling stocks on the liquid market.
However, for decades, stock markets in emerging economies were perceived negatively as casinos for mostly speculative transactions that didn’t seem to significantly impact a country’s wider economy. This phenomenon is reminiscent of John Maynard Keynes’ famous statement that “when the capital development of a country becomes a by-product of a casino, the job is likely to be ill-done.”
Additionally, the banking industry may have lobbied to delay the establishment of stock markets in the Gulf over fears that they could steal its business. However, such worries turned out to be unfounded. Studies have shown that “countries with better-developed stock markets also have better-developed banks and non-bank financial intermediaries,” possibly because a well-functioning stock market also supports the development of other parts of the financial sector, including a dynamic, competitive banking sector and nonbank financial intermediaries.
Moreover, stock markets require companies to satisfy key disclosure requirements, namely the timely release of all relevant information to put all investors on an even playing field and analysis of a company’s strengths, weaknesses, opportunities, and threats. Further, in a period of crisis, listed companies must inform their shareholders about the crisis’ expected impact on their performance and how management plans to address it.
Under these conditions, economies with better-developed stock markets tend to have better-managed companies with up-to-date bookkeeping, accurately audited financials, and data-driven and transparent management decision making. And studies have shown that stock markets can have a lasting impact on long-term economic growth.
Stock Markets in the Gulf Arab States
The Gulf Arab states began establishing stock markets in the 1970s and 1980s. In 1984, Kuwait became the first Gulf Arab country to establish a stock exchange, followed by Bahrain and Oman. Abundant oil wealth delayed similar moves in Saudi Arabia, the United Arab Emirates, and Qatar. In Saudi Arabia, as an example, an informal broker-based system had been in place until 1985 when the government moved to place all stock trading under the control of the Saudi Arabian Monetary Authority, with local banks authorized to act as brokers and to sponsor the Saudi Share Registration Company, which was responsible for managing the records of shareholders and share certificates. Finally, on March 19, 2007, the Council of Ministers approved the formation of the Saudi Stock Exchange, Tadawul, as a joint stock company.
In March 2000, the Dubai Financial Market was established, and the emirate of Abu Dhabi followed suit by setting up its own securities market that November.
The number of listed companies in the Gulf Arab states remains limited, averaging 104 per country at the end of 2022. For comparison, Singapore had 672. Trading, as measured by the turnover ratio – the volume of trading during a period as a percentage of market capitalization – shows weaknesses in some markets, particularly the Bahrain Stock Exchange and Muscat Securities Market. Government-related companies may go public just to implement government decisions. Likewise, family businesses may list in securities markets just to be a name in the industry.
Stock Markets in the Gulf Arab States
A Wilson Center study suggests that wide-ranging market reforms should include diversified asset choices, higher liquidity, larger pools of domestic investors, a transparent regulatory structure, and a more rigorous privatization program. The domestic investor base in the Gulf Arab states lacks institutional investors who constitute the backbone of mature stock markets. Pension funds and insurance companies remain underdeveloped, and other collective savings vehicles face similar limitations and lack professional management, while lack of economic diversification hampers asset choices. Also, small and medium enterprises find it difficult to satisfy the stringent requirements to get listed on national stock exchanges.
While the reforms recently introduced in the Gulf may not be as comprehensive as needed, and some of the issues haven’t been addressed, key changes have strengthened investor confidence, leading to a surge in market capitalization. Notably, the Gulf Arab states implemented initiatives to increase initial public offerings for first-time companies and used market makers to enhance trading and liquidity.
Initiatives to Boost IPOs
Through IPOs, private companies go public, offering investors a new stock issuance. The challenge for executives is to give up private ownership while meeting the market’s transparency requirements. To this end, authorities in the Gulf Arab states have taken measures to encourage IPOs.
Starting in 2016, the Saudi Capital Market Authority asked all listed firms to adopt the International Accounting Standards Board’s International Financial Reporting Standards, updated its IPO regulations by clarifying the listing process and obligations for issuers, including mandatory corporate governance requirements in line with international standards, and permitted foreign investors to invest in IPOs.
The Dubai Financial Market has also made significant reforms. In 2021, as it became clear that it was missing out on the IPO boom sweeping neighboring markets, Dubai announced a plan to list 10 state-owned companies on the stock exchange. The move brought new equity capital to Emirati companies and was a boon for local investors, such as the Emirates Investment Authority and Abu Dhabi Pension Fund. The initiative is expected to encourage private sector companies, especially family businesses, to go public.
According to available estimates, the Gulf Arab states had a total 90 IPOs from 2016 to August 2022 (including 60 IPOs on the Saudi Tadawul and 11 in the UAE). The most notable Gulf IPO was oil giant Saudi Aramco’s listing on the Tadawul in December 2019. Saudi Aramco officials are now discussing a second IPO in Hong Kong, which would allow the company to take advantage of high demand from investors based in mainland China. Moreover, the Capital Market Authority recently announced that 22 companies are waiting to go public on the Tadawul, “subject to market conditions.”
Market makers are specialized individuals or firms that independently buy and sell stocks at quoted prices, even less liquid ones (such as those of some family businesses), thereby providing investors with the opportunity to trade. Market makers must commit to continuously quoting prices at which they will buy and sell. Aware of these advantages, the Tadawul adopted a market maker framework in 2018, which it updated in December 2022 to include its equity and derivatives markets to increase liquidity and ensure prices are efficiently determined, i.e., they reflect all relevant available information, not speculative moves. The Tadawul now uses the New York Stock Exchange’s Arca lead market maker program as well as 12 other market makers.
Meanwhile, Boursa Kuwait, the operator of the Kuwait Stock Exchange, has seven market makers for 62 securities registered for market making. The Abu Dhabi Securities Market has three market makers, and the Dubai Financial Market has five and plans to establish a roughly $545 million market maker fund to support listings and promote secondary trading.
These reforms, undertaken on the back of high oil revenue, led to a surge in market capitalization, defying global trends. During 2021-22, market capitalization surged by 259% on the Abu Dhabi Securities Market, 71% on the Dubai Financial Market, 59% in Kuwait, 21% in Bahrain, 16% in Oman and Qatar, and 12% in Saudi Arabia.
Quarterly Percent Change in Market Capitalization
Putting the Pieces Together
Supported by strong economic fundamentals, high energy prices, and a commitment to diversifying away from oil, recent reforms have proved beneficial for stock market development in the Gulf Arab states.
Going forward, an important first step will be the development of an agenda to increase IPOs for large government-related companies. The demonstration effect of successful offerings, coupled with a culture of stock market investing, may overcome traditional family businesses’ fears of losing control and reluctance to respond to government calls to list on local exchanges.
Once this fear dissipates, companies may see international governance and transparency standards as opportunities to improve management, secure additional funding, and expand production and market access. Gulf Arab states’ financial sectors and long-term economic growth should, in turn, reap the benefits of these reforms.
Given Saudi Arabia’s economic might and Oman’s specialized knowledge, cooperation – rather than competition – in the economic zone space may serve both countries’ interests.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.