MENA financial sector: A drag on growth

Posted on May 24, 2011

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Banks wary about lending. Equity markets without depth. A virtually non-existent bond market.

Infrastructure spending continues to be the key driver of economic growth in the Middle East, and especially so among the oil-exporting nations of the Gulf. Fiscal stimulus, social infrastructure, roads and ports have remained in the bailiwick of governments. The latest numbers reveal that governments in the region continue to take the lead while the private sector still displays a degree of risk-aversion.

In Saudi Arabia, for instance, public sector GDP growth in 2010 attained 5.9%, compared to a modest 3.7% for the private sector. Governments have benefited from consistently high revenues from oil, giving them enough spending muscle to stimulate growth. On the other hand, credit and capital constraints continue to rein in the private sector.

This puts the financial sector in the spotlight. Relative to other regions, fewer firms receive bank financing, bond markets are patchy and stock markets lack the degree of depth and breadth that can support growth. Policies that remove entry barriers and improve the credit information environment may help the banking sector become more supportive of growth. Promoting the development of local debt markets would help too. Consolidating equity exchanges and nurturing an intermediary culture would pave the way for smoother fund-raising.

These are important steps in the evolution of private enterprise, especially small and medium-sized entities, because they have the highest need for smoother access to capital. A vibrant and well-regulated financial sector has the proven ability to support overall economic growth, especially one that is more inclusive.

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