The next global financial meltdown will miss the Middle East. Michael Gordon, Middle East editor for Country Finance and Investing, Licensing and Trading at the Economist Intelligence Unit, explains why.
In the autumn of 1997, while the bottom was falling out from under the new darlings of international investors - Thailand, Malaysia, Indonesia, South Korea - countries of the Middle East were, for the most part, keeping their cool. In fact, the turmoil that struck emerging markets in mid to late 1997, and which deflated economic growth in those markets through 1998, largely left intact the financial markets of the Middle East. For sure, exports slackened to southeast Asia and lowered growth for the region, but no virulent crisis of confidence struck the Middle East. Why?
Blessings come in many disguises. The Middle East has never been the darling of international investors, and while this lack of popularity on the international finance scene has limited inflows of capital, some degree of anonymity has had its advantages. Political instability, a limited availability of investment options and a general lack of understanding of the region have kept many potential investors away.
Take Vietnam, for instance. Geographically at the epicentre of the largest financial crisis of this decade, the country was hit by a decline in exports to its neighbours, but since access to its rudimentary capital markets has always been difficult, a complete financial implosion as seen in a country like Thailand never occurred. In essence, no stock market, no stock market crash.
The Middle East is no Vietnam, however. The region is considerably more integrated into the world economy and its capital markets more advanced. Nonetheless, except for that of Turkey and to some extent Israel, the capital markets of the region generally have insufficient liquidity, and the presence of foreign portfolio investors on the local exchanges is minute. Because of its marginal significance in emerging market investment (a scant 0.8 per cent of total emerging market capitalisation), Egypt has made use of domestic sources of investment. By April 1999, as many as 21 local mutual funds were operating in Egypt. Since these funds are, for the most part, denominated by domestic investors and underwriters, the fear of foreign investors and speculators dumping the funds is non-existent.
But lack of exposure to global vicissitudes is but one of the factors inoculating the region from crisis...