In the Arab world as elsewhere, stock markets mirror the economy as a whole. When Wall Street falls, Americans feel poorer, often with serious implications for the rest of the economy; rising shares on the other hand make people feel richer. The rhythm of the markets is sometimes as significant as the direction of share prices, with a huge climb or drop in one day, for example, having a different effect on sentiment than the same price change spread out over a week. Volume is also important: a market with a handful of companies or a modest number of their shares traded daily is not usually an accurate mirror of business. However, stock exchanges are more than just reflections of changes in the real sector, especially in emerging economies. Widespread share ownership is usually associated with open economic systems as business power devolves away from states or oligarchies. Bourses are also places where people or companies raise fresh capital to set up new businesses or to expand old ones - perhaps the most important of their functions. In these and other respects, Arab bourses - where they existed - used to be laggards, but no more. Developing regional share markets over the past few decades have served to make doing business easier, and help people become richer. When the first oil boom began in the mid-1970s, most Arab countries did not have share markets; today, the majority of regional capitals can boast a stock exchange of increasing size and sophistication. In the context of overall economic liberalization in the Arab world, the establishment, development and reform of bourses has interacted positively with other change, as more transparent and professionally run share exchanges have emerged hand in hand with liberalizing economies. Jordan is an example of how things have gone well in this respect, with the Amman Stock Exchange proving to be an important element of the positive economic change that has characterized the country. The year just ended confirmed this trend, as the ASE general index surged 36 percent during 2007. Market capitalization surged by 39 percent to $41.2 billion, representing 289 percent of Jordanian gross domestic product. This percentage is one of the highest in the world, reflecting the importance of bourse activity in Jordan s economy. Moreover, the trend in these important indicators is sharply up, with bourse capitalization having been a mere $11 billion in 2003, closer to the equivalent of the kingdom s GDP at that time. Before readers of bitterlemons-international.org drop everything to rush out and buy stocks on the ASE, a word of caution: the Jordanian bourse remains a delicate one dominated by the share of one business, the Arab Bank, which still makes up a big chunk of market capitalization and activity. Though robust and soundly managed, if that august institution s chair so much as sprains his wrist the whole ASE can begin to look wobbly. Not that this isn t a feature of other Arab bourses: for example on the Beirut Stock Exchange, 74 percent of total trading activity of the last week of 2007 was in one company, Solidere, the real estate developer, typical of that firm s dominance of the Lebanese bourse. The Beirut exchange wobbled nervously in 2007 due to the country s chronic political crisis, but still managed to record a 26 percent annual rise. Though that was not as strong as some other Arab bourses, the achievement was quite good considering that the country has become a laggard in both the growth of its economy and the reform and development of institutions. The same pattern looks to be emerging in 2008, as the first week of the year saw shares zooming upward on news of an Arab reconciliation initiative to bring feuding Lebanese factions together. I hope I am proved wrong, but sadly this trend will probably not last and the next few weeks or months will mostly be ones of economic instability coupled with further delays in implementation of much needed reforms. Though Beirut is an extreme case, a handful of key shares generally tend to dominate individual Arab bourses, partly a reflection of the still-oligarchic nature of their systems. Nevertheless, regional stock exchanges continue to diversify. For example, the 2007 climb in the ASE general share price index was due more to the 31 percent rise in industrial shares than the 14 percent gain in the financial sector, which of course is dominated by the Arab Bank. Another reflection of diversity on the ASE is that among top gainers were shares of media companies, quarrying and mining industries, energy firms and information technology and telecom entities, their sub-indices going up by 81, 70, 59 and 38 percent respectively. Banks also did well, but were not market leaders. Diversity in the nationality of shareholders is also becoming more of a feature of Arab markets. For example, net foreign investment on the ASE was almost 49 percent of overall market capitalization at end-2007, compared to the 2004 figure of 41 percent; non-Jordanian Arabs contribution was close to 36 percent while that of others accounted for about 13 percent. Sectorally, non-Jordanian ownership of industry stood at 52 percent while that of the financial institutions was 51 percent and other services 36 percent. Though a more smoothly running stock exchange also helped, these high percentages would have been difficult to achieve under the kingdom s restrictive investment laws of a decade ago, a change toward liberalization paralleled in other Arab countries. Riad al Khouri is visiting scholar, Carnegie Middle East Center, Beirut, and senior fellow, William Davidson Institute, the University of Michigan, Ann Arbor. This column is published by DAILY NEWS EGYPT in collaboration with bitterlemons-international.org
