The Gulf’s Uphill Upgrade

With the Ramadan fasting season underway, Gulf equity markets UAE and Qatar sputtered in their quest to enter the MSCI core roster on respective trade settlement and foreign share ownership shortfalls that will be revisited at year-end. While the denial on technical factors was unsurprising, dedicated MENA investors have cast the decision as a near-miss positive story amid a welter of regional reverses, and cited much more sophisticated Korea’s failure as well to move from emerging to developed designation. The Emirates’ exchanges outside Nasdaq Dubai have just introduced a delivery-versus-payment system, while Qatari officials have refused to relax access and minority stake limits on key listed companies. Such firms recently committed to $10 billion in projects to support Egypt’s transition, including a port around Alexandria. Saudi Arabia had before deposited $1 billion at the central bank there and pledged $500 million in bond buying, while the US offered $1 billion in debt relief and the same amount to guarantee new external borrowing. The coming fiscal year from July projects a $10 billion-plus financing gap which another IMF facility in addition to freshly-planned EBRD lending would have helped bridge but was rejected. The Gulf Cooperation Council’s individual member aid to Cairo coincided with an invitation by the group for Jordan and Morocco to join. The 30-year old club had previously extended a $20 billion economic package to Bahrain and Oman to quell unrest, and endorsed the dispatch of Saudi forces across the strait to Manama. The Jordanian and Moroccan kings unveiled designs for more popular government participation alongside increased social and subsidy spending to discourage protests, and King Abdullah was praised during a Washington visit for the moderate steps. The Casablanca exchange in turn hewed to positive territory until mid-year despite continued street unrest and terrorist incidents that cramp mainstay tourism. In Tunisia where the so-called Arab Spring originated, a $25 billion investment program was presented at the G-8 summit in France to a lukewarm response as participants deferred to the private sector to consider the infrastructure and modernization blueprints. The ousted Ben Ali family was found guilty in absentia of embezzlement and corruption as the thinly-traded bourse remained down.

For Bahraini paper the rating tendency has been opposite as banks joined the sovereign in May credit downgrades on financial services, real estate and hospitality weakness “in light of recent political turmoil,” according to Moody’s. A $1 billion international bond  has been delayed after a $200 million issue early in 2011, which contributed to a Q1 $30 billion regional sukuk tally as compared with $50 billion for all of 2010. Egypt and Jordan had started to implement Islamic finance rules before their violence erupted and upgrades to other traditional structures took precedence.