THE surge of interest in so-called emerging markets has largely passed the Middle East by. It is estimated that foreigners held more than $100,000 million of emerging market shares at the end of 1993 but almost none of it could be traced to the Middle East. Latin America and the Pacific Rim were the big beneficiaries. The Middle East is a notorious capital exporter and will likely remain so until there is radical reform of its financial markets countries combined.

Faquih strongly supports efforts to attract foreign finance to the region, but says that it is pointless to expect it before Arab countries have created adequate investment laws and organised their financial markets. There have been advances and some Arab countries have freed prices and removed investment barriers. 'But these countries are still in need of developing a comprehensive (investment) structure. In those countries that have them, they are weak in legislative and structural respects and fall short of a legal framework to organise their markets.'

Despite such a downbeat assessment, international investors are keen. 'We have been sending investment teams to the area for some time,' says Dan Smaller of Lehman Brothers in London. The bank has managed investments on behalf of clients in Jordan, and is particularly interested in the Maghreb. Lehman was also the lead placement agent for Morocco's recent privatisation of Cimenterie de l'Orientale (Cior). The Cior flotation was the first to have a dedicated international tranche and it was fully taken up (MEED 14:1:94, Morocco). Lehman is also interested in Turkey's privatisation plans (MEED 10:12:93).

Drawn by the prospects of an end to the Arab-Israeli conflict, Barclays de Zoete Wedd Group recently set up the Israel fund, in an initiative which could be expanded to other countries in the region if the conditions are right. The London-based investment bank is holding back from a wider regional involvement because the range of investments is narrow and access to most financial markets is still very restricted. But there is potential and the possible emergence of a Palestinian entity has obvious attractions. Palestinian expatriates, Israeli and Arab investors, and international agencies will all be looking for investment channels. The Amman market has reportedly attracted the attention of foreign pension funds which are testing the water on a small scale.

The International Finance Corporation (IFC) has shepherded several regional states through a process of economic liberalisation and notes considerable progress. Morocco, Pakistan, Jordan and Tunisia have all reduced government controls, opened up financial markets, reduced trade barriers and lifted many foreign exchange restrictions. They now present a more attractive prospect for private

capital and foreign investment.

The IFC has set up a Near East fund to invest in the Maghreb and Middle East, priming the stock market and acting as a catalyst for other investors. The fund will focus on Morocco, Tunisia, Egypt, Jordan, Palestine and Turkey. The IFC hopes the fund

will make the stock exchanges more familiar to international portfolio investors, increase market liquidity and improve the flow of financial information (MEED 19:11:93).

In a similar effort, the UK's Overseas Development Administration (ODA) is financing a study on regional stock markets with the aim of developing the local exchanges by harmonising structures and regulations. The study will include stock markets in Egypt, Jordan and Israel, as well as the occupied territories. Five UK-based consultants have bid for the job (MEED 28:1:94).

In the Gulf, the potential for international involvement is more limited, bankers say. Saudi Arabia has the most modern and most active exchange in the region. In 1992, the computerised share dealing system operated by the Saudi Arabian Monetary Agency (SAMA - central bank) handled deals worth $3,700 million. But business is tightly managed through the banks, brokers are active but have no legal status, foreigners are excluded and most of the joint stock companies that account for the bulk of the market are majority state-owned.

As the region's offshore banking centre, Bahrain is very conscious of the need to modernise its financial markets if it is to retain its edge as a world-class money centre. Bahrain was the first Gulf stock exchange to allow partial foreign investment when non-GCC nationals were allowed to purchase shares in ABC and the offshore investment bank Bahrain International Bank (BIB). Activity on the exchange doubled between 1989-92 with the volume of shares traded rising to 190 million; the value of shares traded rose by 340 per cent in the same period to BD 63 million ($167 million).

Two more banks, Faysal Islamic Bank and TAIB Bank, will soon be publicly registered and open to non-GCC investors. However, these banks are the exception and had to obtain cabinet permission before their flotations. The pace of reform remains slow, Bahraini brokers say. One initiative under consideration is to permit non-Bahraini companies in the region to list their shares on the stock exchange. Stock exchange officials expect this to be approved by mid-1994.

Cross listing

Bahrain and Oman also hope to become the first two Gulf exchanges to establish a cross listing linking the Manama and Muscat exchanges and offering equal access to the two exchanges for investors in both countries. In addition, Oman plans to open the Muscat exchange to GCC nationals. Oman's privatisation plans will further boost activity if they come to fruition. 'A common Gulf stock market is our target,' says Fawzi Behzad, chairman of the Bahrain exchange. 'It is a feasible project but it will not see the light in the near future. It needs time.'

Other Gulf markets are scrambling to put their house in order. Both UAE and Qatar say they are planning to open formal stock exchanges this year. After 10 years of informal consideration, the UAE appointed a committee in January, headed by central bank chairman Mohammed al-Meraikhi, to work out rules for an official stock market.

Currently, UAE share trading in 22 banks, insurance and service companies is handled over the telephone by brokers; the market value of shares was just under $10 million at the end of 1993. Brokers say a formal market would rapidly increase this figure, especially if the government's privatisation plans materialise. Without a formal exchange, small investors stay away and many dealers prefer to hold onto shares as a long-term investment.

However, the bullish talk cannot disguise the limitations. 'We would love Bahrain to become part of an emerging markets portfolio of one of the big international investment banks,' says one Bahrain-based offshore banker. 'But the range of shares on offer is still too limited and there are still too many restrictions to attract the big investors.' Confidence is another crucial factor. Says another local banker: 'It won't really take off until we get more private companies on the exchange, but these are family owned and guard their independence jealously. In addition, people are still nervous about leaving too much of their capital in the region.'

Until such reservations can be overcome, the Middle East will not attract the international interest that other parts of the developing world have managed to exploit so successfully over the past two to three years.