Monday , January 25 2021

Arab States should be cautious with indexes that bear easy money

(Bloomberg Opinion) – The rivers of the foreign capital are open on some states in the Middle East, because key factors are attributed to their inclusion in emerging market indices. In the coming year, Saudi Arabia and Kuwait are expected to join the MSCI EM index in Egypt, United Arab Emirates and Qatar. At the same time, Saudi Arabia, Qatar, UAE, Bahrain and Kuwait J.P. Morgan Emerging Market is expected to join Oman in the government bond index. In 2018, in the Russell Index of FTSE, Kuwait was classified as a "secondary emerging" condition, and Saudi Arabia is expected to be included in March.

The millions of dollars included in this index will be credited to their debt and equity markets, for which their governments will need less effort. But this simple finance can impede economic reform, reducing the development of liberalism, good governance and law governance markets, and most of the capital, where the state points out more about capital, with greater natural-wealth income, and Risking foreign policies, as long as the equity and debt markets are integrated into the global financial system.

With the acquisition of these capital, governments will encourage local lending to finance their deficit, while local private companies have to do a little bit to increase more organic growth. When the government took some steps to regulate their capital markets and exchange, to achieve index content, to start some industries and to create a level-playing field for business, complete a strenuous structural improvement.

Young entrepreneurs of the losers will try to compete with state-owned or state-related companies and new companies seeking venture capital. There is still bad news for the poor Arab people over the complaints of economic instability, indivisible privilege and admissions system, encouraging poor prospects for private sector employment, due to the 2011 Arab Revolt.

Which countries attract the largest share of index-linked capital inflows? Some regional favorites are already emerging, and it is not necessarily the states that work towards real economic reforms.

Instead of proving diversification efforts, there may be the effect of leaving the index-index behind. Dubai's inflation, the coastal areas of economic exposure in the area are relatively flat, while neighbors are seen as safe storms or at least the gallows of fruit, they get more. Kuwait and Egypt are looking at a large influx of foreign capital. Severe change in Saudi Arabia, the result of the 2017 corruption sentence and the reaction of Jamal Khoggi's murder.

In October last year, Kuwait received more than $ 700 million in net foreign inflows in 2018, more than the previous year, according to a research by MFG-Hermes SE. This led to inactive flow through the FTSE tracker. Other reasons for increased investments were GDP ratio, the national budget which is broken at a lower rate for oil, government programs for increasing infrastructure investment, and (a comparison of some of its neighbors) foreign policy environment without problems. Egypt's flow is related to the source-income (especially, the development of natural gas production for exports), improved tourism and the sharp size of the consumer market. In the content of Saudi Arabia, the inactive flow, starting from March, is expected to increase by $ 16 billion.

For investors, incorporating resource-rich Arab states in the emerging market indices will increase their vulnerability to fluctuating energy prices. Sovereign debt from the Gulf Cooperation Council countries now accounts for 30% of emerging markets.

Will this vulnerability encourage investors to investigate government and state assets reporting? Will they focus on financial advertising by the listed companies, and will try to create CDs for small companies to be publicly listed?

Maybe not Instead of inactive flow, governments need to start investing directly from both foreign and local sources, to support the formation of a new business and to improve the delivery of jobs. In the meantime, foreign investors will be struck by the index.

This column is an editorial board or a Bloomberg LP. And do not reflect the views of its owners.

Karen E. Young is a resident scholar of the American Enterprise Institute.

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