The Arab Transition’s Horizontal Hesitation

The IMF’s Middle East Department circulated a comprehensive financial sector reform blueprint in its lengthy report Toward New Horizons during the spring gathering, which urged a regional bond initiative modeled on Asia’s as well as a major Islamic-style push following Gulf embrace. Its survey of the bank and non-bank systems in Egypt, Jordan, Libya, Morocco, Tunisia and Yemen found numerous gaps compared with emerging market norms, with credit-GDP within acceptable parameters but at high concentration and NPL levels and poor risk management and infrastructure under lingering state domination. Connected lending is rife and private credit bureaus and collateral and insolvency regimes lag. Competition is low with onerous licensing requirements and government bonds are “underdeveloped” while corporate and asset-backed ones are “negligible.”  Stock exchange capitalization is decent but trading volumes and “free float” are small with heavy family ownership and absent institutional investors.  Corporate bond issuance has been confined to bank Tier 2 fund-raising in Morocco and Tunisia, and transition country fixed-income funds are only $15 billion according to the publication. Official yield curves and auction calendars, primary and secondary activity structures and electronic clearing and settlement platforms must be established. Egypt and Jordan have the “least diversified” investor bases as banks and state insurance and pension arms take 75 percent of debt. Public social security pools often have large reserves but too conservative asset allocation and no outside managers. Foreign participation is minimal with limited scale and awaits capital account liberalization and potential cross-border tax, rating, guarantee and infrastructure alignments which can draw on neighboring GCC and other area initiatives. Leasing is an overlooked Sharia-compliant instrument designed to aid small enterprise, but only represent 5-10 percent of gross capital formation in Jordan, Morocco and Tunisia. Private equity is paltry at .05 percent of GDP with no startup venture framework. Libya plans to convert to a full Islamic finance system by 2015, but integration into the existing credit and capital markets regime elsewhere has been slow with dedicated oversight missing. Basic deposit insurance, resolution, and corporate governance arrangements lag and although bank privatization has been pursued for two decades, the government is still in command in Egypt, Libya and Tunisia without “objectives and vision” the Fund admonished.

Its Jordan and Morocco programs went forward relatively smoothly despite the criticism on praise for food and fuel subsidy reduction amid persistent above 5 percent of GDP current account deficits. Sinai gas disruption and Syrian refugee overflow continue to buffet Amman and the US and Gulf nations have increased emergency aid amid steady remittances. Morocco’s FDI was $3 billion in 2013 and international reserves are now at $1.5 billion. The central bank recently halved reserve requirements to 2 percent as banks and the sovereign increasingly tap global debt desire, with the latter’s rating at the cusp of investment-grade despite lingering crown achievement reservations.