How “Private” are MENA Capital Markets?

This blog is written by Alissa Amico (Program Manager, MENA, Corporate Affairs Division, OECD).

Most stock exchanges in the Middle East, with the exception of the Palestine Stock Exchange, the Dubai Financial Market and a few broker-owned markets in North Africa are – unlike their largest global peers – state owned. While some exchanges in the Middle East have explored privatization or ownership restructuring, only the Kuwait Stock Exchange has moved in this direction. It is debatable whether and under what conditions other exchanges in the region will follow and if the timing is right, with the impending opening of Tadawul to foreign investors and the intense competition among financial centers in the region.

Even less known than the ownership model of exchanges, is the type of investors who dominate markets in the region. While the dependence of MENA markets on retail investors is no secret, less is known about the behavior and profile of institutional investors. And this is crucial as exchanges seek to attract foreign capital flows and encourage long-term investment. Institutional investors in the region are quite different in profile from developed or even other emerging markets, which are dominated by investment and pension funds and insurance companies.

While retail investors in the MENA region may drive turnover volumes, governments are in fact the largest shareholders not only in exchanges themselves but also in the companies listed on them. Today, 62% of the market capitalization in the region relates to firms in which sovereign shareholders have investments (10% and above). Of the 600 largest listed firms in the region, close to 40% have sizeable state shareholdings. As we narrow the sample to the top 100 largest firms, state ownership becomes even more prevalent at 89%. Moreover, 34 of the top 100 listed firms are state-controlled. It is therefore of little surprise that of the ten largest portfolio investors in the region, only one is private: the rest are sovereign.

While it might be tempting to argue that governments are passive shareholders who inherited stakes as a result of listing SOEs on stock exchanges, this is only part of the story. State ownership in capital markets is not limited to post-privatization holdings: active investments by sovereign investors in listed firms have contributed significantly to it. Only a fraction of these investments are direct stakes by states or sovereign wealth funds. State-controlled pension funds, insurance companies and banks are anything but negligible shareholders, with majorities and minorities in hundreds of listed companies. This may come as a surprise given that MENA markets are often presumed to be controlled by private, founding shareholders, not by the governments.

The high degree of state ownership in capital markets, in addition to state ownership of strategic, unlisted firms, matters for a variety of reasons. First, our understanding of state ownership in the region needs to take into account state participation in capital markets, which is high even when compared to emerging markets such as India and China. Second, listed SOEs, whether controlled or not, are subject to corporate governance standards and are therefore as transparent as any other listed company. That said, the objectives of government shareholders may differ from those of private investors and with the entry of additional foreign capital, the growing diversity of investors may prove a delicate balancing act.

Ultimately, insofar as sovereign investors are a sizeable part of the capital markets puzzle in the region, our thinking on the development of stock exchanges cannot ignore their presence and their possible interests. It could be argued that attracting foreign institutional capital could be a challenge in firms that are state controlled, although some evidence shows that these firms tend to have a more generous dividend policy and some may enjoy an implicit sovereign guarantee. Perhaps a larger question that lurks behind the figures is whether states will remain the fixture of MENA capital markets in the longer term and what happens if and when they need to mobilize the capital invested in public markets for other means.

The views expressed in this article are those of the author and do not represent the official views of the OECD or its member countries. This article is based on an upcoming research paper authored with Zeynep Ozcelik, Senior Researcher, Center for Corporate Governance, Bogazic iUniversity.

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