“Financial integration in MENA countries would lessen their vulnerability to global shocks”

pic1marchéfiProfessor of Economics and Director of the Institute of Financial Economics from the American University of Beirut, Lebanon, Simon Neaime advocates financial integration in Southern Mediterranean countries. In his capacity as coordinator of the FEMISE study entitled “Financial integration and shock vulnerability: Implications for the Cost of Capital in emerging markets”, Simon Neaime delivers the main conclusions.

You support financial integration in Southern Mediterranean countries. What is the current situation and what are the benefits for listed companies?

Simon Neaime : At the moment, the stock markets of Egypt and Jordan are showing signs of attracting foreign and domestic investors. We cannot say the same for those in Morocco and Tunisia.

Greater financial integration for countries in North Africa and the Middle East (MENA) would reduce the vulnerability of these markets to global shocks, while providing significant benefits to investors in the region, by making capital more mobile and reducing borrowing costs. It would reduce exposure to short-term speculative capital flows and would help raise the growth rate of these countries. Investors in the MENA region would have access to a variety of risk-adjusted rates of return, while improving portfolio diversification.

Isn’t risk actually a greater vulnerability in a global financial crisis?

S. N: This is true only in the case of a crisis, but the long-term benefits are far greater. In the FEM34-10 study, we show that if financial integration has advantages over the long term, it comes with destabilisation costs in times of international crisis. This is not confined to the macroeconomic scale but also affects the cost of microeconomic capital. This may partly explain the observed decline in investment in the region in the wake of the global crisis.

Lifting restrictions on ownership

Which channels attract more foreign capital?

S. N: New privatisation plans in Morocco and Tunisia would attract investors. We must revitalise stock markets to encourage international shareholding in listed companies. We suggest lifting restrictions on ownership and also on barriers to trade and capital flows.

In these countries where the informal sector plays a significant role in the economy, how do we manage to establish clear, transparent accounting rules?

S. N: The FEMISE study recommends establishing clear, transparent and stricter accounting rules (accounting standards, audit requirements). Previous studies have shown that imperfect information leads to mimetic trade. This leads to significant increases in the correlation between the indices of domestic and international markets in times of crisis, ultimately leading to an increase in the cost of equity.

Photo: Econostrum

Article by Nathalie Bureau du Colombier, Econostrum. www.econostrum.info. Registration for the Econostrum newsletter http://www.econostrum.info/subscription/