All members of the Gulf Cooperation Council (GCC) have heavily invested the wealth garnered from their natural resources into diversifying their economies.
This has been evident in improvements made to transport and information infrastructure, as well as advancements made in services and amenities.
The most visible result of these investments has been the creation of world-class tourist destinations in several GCC states (with Dubai the stand-out example). Put together, these investments have allowed for a significant improvement in quality of life for their citizens and residents.
In tandem with this burgeoning reputation for quality, several GCC states have concentrated on developing other sectors of their economies to stimulate growth.
Bahrain and Kuwait were early pioneers in offering financial services outside their borders comparable to those in other developed nations, but other members -- notably Qatar and the UAE -- are catching up, working to broaden and deepen their financial sector offerings.
One essential aspect of the process involves the deepening of the region's capital markets. More efficient capital markets will encourage foreign and local investors to invest in GCC businesses.
By attracting new investors, the liquidity of the marketplace is improved, which is in itself an attraction to other investors.
A healthy amount of liquidity suggests pricing accuracy and confidence.
This leads to a virtuous circle -- the growth of the regions' capital markets allows businesses to expand and develop their offerings, attracting further investment and development.
In order to achieve this, the financial sector needs to attract and foster second and third tier players from the institutional investor and asset management communities.
Yet these market participants require improved standards around transparency and information availability, as well as a benign regulatory environment.
A key step to accomplishing this involves the extension of regional banks' retail deposit and savings bases.
A growing deposit base will improve institutional compliance with regulatory capital requirements and, as such, free-up capital for lending and re-investment.
A similar impact needs to be made by encouraging the public to save for their pensions in private pension funds and by developing the retail insurance markets.
This would contribute to the growth of the fund management industry and consequent equity capital markets investment in the regional economy.
In this respect, GCC nations benefit from the experience and knowledge accrued in the rest of the world following the financial crises of recent years.
Indeed, global asset managers now increasingly appreciate the need to improve their risk management and valuation capabilities following the banking collapse in 2008 and the on-going sovereign debt crisis.
And this means having the clearest and most robust data and research resources, providing actionable investment insight across all markets and risk management systems which serve institutions effectively.
As part of this, many fund managers are now seeking perspectives across different asset-classes in order to gain a fuller appreciation of the risks they are absorbing and to inform their investment decision-making processes.
For instance, this can mean combining fundamental analyzes with equity research to understand how the one can inform the other.
Indeed, managers are increasingly aware that signals in the equity market can lead to significant arbitrage opportunities in the corporate bond market and vice versa.
The perceived relationship between probability of default and market or liquidity risk, and the spread on corporate debt versus a company's share price, can all also provide actionable insights for both investors and risk managers.
Likewise improving and expanding risk ratings standards will also improve an investor's tool-kit.
Credit scores, for instance, which benchmark by fundamental performance across a universe of both rated and unrated entities, can be an invaluable analytical instrument for investors determining counterparty risk levels and screening for investment opportunities.
Such research capabilities -- the likes of which S&P Valuation and Risk Strategies is providing to many fund managers in the region -- give investors confidence to make more informed and reliable decisions.
However, regulators can do much to support the capital markets too.
Their main role is to encourage market participants by removing obstructions and lessening bureaucracy, as well as providing incentives for second and third tier investor pools. But their role goes beyond this.
Although a healthy market will do much to attract foreign investment on its own terms, improvement in regulatory dependability is necessary to attract the fullest range of investors - providing a breadth to financial service offerings and depth to the capital markets that would otherwise be difficult to achieve.
© Arab News 2011
