DIFC Forum highlights favourable outlook for MENA region

• IMF launches regional economic outlook from DIFC
• Focus on performance of financial markets: debt, equity and Sukuk
• Discussion of nationalization policies and alternative schemes

The Dubai International Financial Centre (DIFC) held its second DIFC Forum focusing on developments, challenges and prospects relating to the MENA region’s economies and financial markets. This event, which forms part of a series of quarterly workshops and seminars launched by the DIFC earlier this year, was attended by chief economists, financial analysts and market specialists, as well as representatives from international financial institutions and think tanks, and regional central banks and capital market authorities.
During this Forum, Dr. Mohsin S. Khan, Director of the Middle East and Central Asia Department at the International Monetary Fund (IMF) launched the IMF’s Regional Economic Outlook for the Middle East: “Overall, 2005 and 2006 were good years, with GDP growth rates in excess of 6%, and 2007 is shaping up to be another good year. GCC countries have jumped to this level and it is now essential to maintain it. Macroeconomic performance has been strong and near-term prospects are favourable, but financial and trade integration and the development of capital markets is essential to sustain this growth.”
According to the IMF report, GDP growth across the MENA region continues to outpace global growth rates; oil exporting countries are seeing steady growth of approximately 6%, with low-income countries growing fastest, whilst the UAE has been growing at an average of 10%. At the same time, inflation is seen to be rising, except in low-income countries, and inflationary pressures are likely to intensify in oil exporting countries from 7% to 10%. Middle East stock market performance was considered to be mixed in 2006, with most GCC markets declining sharply. A surge in the issuance of Islamic bonds was also acknowledged and it was recognised that these are now a major capital market product.
Dr. Khan also mentioned some of the risks to the positive outlook: a slowdown of global growth, which would impact exports and investment; a rise in global interest rates, which could reduce capital flows; further corrections in local asset markets; inflationary pressures, particularly in the UAE and Qatar; and geopolitical issues and conflicts, which could lead to a reduction in foreign and domestic investment. He recommended the introduction of policies and the implementation of reforms to foster macroeconomic and financial stability, control inflation and encourage private sector participation and development.
The financial markets across the MENA region were also under scrutiny, with particular focus on money debt, equity and Sukuk markets and the recommendation that authorities should look at the development and integration of financial markets.
Mohieddine Kronfol, Managing Director at Algebra Capital, outlined the recent performance in local currency money markets, which have been stagnating as a result of debt redemptions, particularly in GCC countries. Mr. Kronfol noted that equity capital market development is not sustainable without parallel debt market development.
Dr. Armen Papazian, SVP Innovation and Development at the Dubai International Financial Exchange (DIFX) provided an overview of the latest developments and future prospects of the Sukuk market, which has seen rapid growth over recent years, with the issuance of 412 Sukuk worldwide from 2001 to 2007, and the DIFX now boasting the highest value of global Sukuk listings.
Philip Khoury, Head of Research at EFG Hermes spoke about the recent performance and outlook for GCC equity markets, focusing on the factors affecting these markets, such as the level of Western institutional participation and the real estate market. He also outlined important factors encouraging foreign investors to the region, which included corporate governance, valuation and liquidity.
Another key subject under discussion related to Gulf labour nationalization policy issues, job creation and the need to increase the participation of nationals in the labour force and in economic diversification. Alternative ideas were considered in order to introduce a market mechanism, based on employment vouchers scheme instead of a administrative rules , proposed by Dr. Kenneth Wilson, Professor and Director of the Economic Policy Research Unit at Zayed University.
Commenting on the outcome of the Forum’s workshop, Dr. Nasser Al Saidi, Chief Economist of the DIFC, said: “The consensus of the IMF and the DIFC Forum participants is of a favourable economic outlook for the MENA region, with continued strong growth, increased economic diversification in the non-oil sector, fiscal and current account surpluses for oil producers running at some US$180-190 billion, and a cumulative surplus of more than US$870 billion over 2003-07. The management and sound deployment of the region’s new wealth will be a major challenge. Structural and policy reforms are required to sustain growth. In particular financial market development should be a main policy priority. The region needs to develop its bond and equity markets and integrate them. We believe the Sukuk market can grow rapidly to help finance infrastructure projects and private sector investments. The countries of the region also need to develophousing finance and mortgage markets. DIFC will aim to be at the centre of the efforts to develop sound and efficient financial markets to sevr the economies of the region.”