What is a financial market?
A financial market is a spectrum term meaning a market where buyers and sellers exchange assets in the form of stocks, currencies, and derivatives. The forces of supply and demand determine the price of these assets.
Depending on what is traded, there are mainly two types of financial markets:
1. Capital markets – where securities such as bonds, stocks, etc. are negotiated. They are for long-term investment.
2. Money Market – where highly liquid items like US Treasury bills, coins, etc. are negotiated. They are for short-term investments with equal chances of big gains and big losses.
Why is the financial market important?
Financial markets mobilize domestic savings and foreign capital for productive investment. The economic growth of any country depends on the efficiency of its financial markets. An inefficient financial market would mean that you are not exploiting all the opportunities and an inefficient one will cripple you and prevent you from competing on a global scale.
Your level of sophistication:
• Promotes Foreign Direct Investment (FDI)
• Allows national companies to raise funds for growth and expansion
Overview of the structure of the CCG market
The development of its financial markets has been a priority for GCC since 2002. Its vision has been mainly to promote the development of local markets such as the UAE market structure and the Kuwait market structure, and to make the GCC countries a financial center in the region. With oil prices falling and oil reserves depleted, the GCC region has no choice but to diversify its economy to achieve sustainable growth.
Current structure of the CCG market
Saudi Arabia’s market structure, while solid (none of the banks collapsed after the global financial crisis in 2008-09), still lacks sophistication. Most domestic companies, even now, use their retained earnings or traditional bank loans to finance their growth activities. Compared to its Asian and Latin American counterparts, the region accounts for just 0.8% of global capital stock, according to a Deutsch Bank report.
The share of GCC countries is even lower at just 1%, says an IMF report. The weak participation of the UAE market structure is due to the strong involvement of the government in economic activities and the weakness of the private sector.
To measure financial market development, the ratio of financial assets to GDP is used. The GCC’s 0.8% share of the global financial market versus its 1.7% share of global GDP shows a skewed size of the financial sector.
Kuwait’s market structure, however, shows that the financial sector plays a significantly higher role, 14% to be precise, in its share of GDP. For GCC, we have full financial chips at just 6% of GDP.
The current capital structure of the GCC shows that the countries are not only lagging behind in terms of economic potential internationally, but also in relation to the development of the region.
Problems identified with the market structure of the CCG
• High banking concentration, especially in the Saudi Arabian market structure, due to limited access by private players. The national and public monopoly has led to a poor investment environment and restrictive policies. Gradually, however, policies are being reversed to encourage liberalization.
• The weak competition that has led to high prices, less variety of financial instruments, poor services, etc.
• Equity markets in GCC have been far behind in terms of international standards with a concentration in the largest sector in Saudi Arabia. The stock market plays an important role in Saudi Arabia’s capital structure, contributing 61% of the total national financial assets.
• Since it is easy to make money from government projects, individual entrepreneurship is not supported and financial institutions do not play their role in allocating risk and venture capital.
last word
Although the liberalization and privatization of the GCC market structure is already underway, the GCC region still has a long way to go. According to an IMF report, they should focus on the following financial sector reforms:
• Strengthen supply and demand
• Reduce government involvement and open up to foreign competition
• Improve the banking regulation and supervision framework
• Develop efficient and effective capital instruments for financing