Globalization of financial markets helps companies to borrow funds from cross border financial markets. Investors are seeking returns on their investments with lower risks. Diversification is an effective way to reduce risk of investment not only in local but international portfolio management as well. Investors invest their funds in financial markets with feasible market conditions, particularly lower systematic risk. Factors such as political stability, stable economy, lower interest rate and low rate of inflation attract investors to invest in international financial markets. The fall in oil and gas prices, the revenue and economic growth of Arab countries that are rich in oil deposits and heavily rely on their hydrocarbon industry have been affected adversely. Moreover, the international political conflicts between Arab states such as blockade of Qatar and boycott of diplomatic relations with Qatar by Saudi Arabia, United Arab Emirates, Libya, Egypt, Bahrain and Yemen is affecting the political outlook of whole region negatively. It is one of the main reasons why MENA countries have lost their charm and attraction of investors due to political instability and heavy reliance on oil and gas industry that is highly correlated with economic fluctuations in international markets.
Factors Driving Globalization
Liberalization of economies have attracted foreign investors. Qatar has also changed its law for non-resident investors to invest their funds in real estate projects and can enjoy up to 49% ownership in these projects (Mohamed, 2018). Kuwait is also making liberalization to attract foreign investments (Moore, 2017). These political policies and changes in regulations to attract Foreign Direct Investment causes globalization of financial markets. The revenue of countries in GCC region has been affected negatively due to decrease in oil and gas prices. The budget deficit has increased due to decrease in revenue of governments which is forcing these countries to raise funds through issuance of bonds in the international financial markets. The objective of companies is to borrow funds at lower cost of capital in order to increase value of their projects. It is an important reason that has affected globalization of financial markets because companies issue corporate bonds in international markets with lower rate of interest instead of issuing bonds in domestic financial markets. Another factor that helps in globalization of financial markets is advancement in Information and Communication Technology along with development of banking system. Kuwait also affected by this increasing gap between revenue and expenditure decided to issue bonds in international markets. Kuwait issued bonds in United States capital market through services of HSBC, Citi Bank, JPMorgan, NBK Capital and Standard Chartered Bank. It shows that banking system and financial intermediaries have played an effective role in globalization of financial markets. (Moore, 2017).
Political and Economic Factors affecting Globalization
Political stability is the most basic and important factor that affects globalization of financial markets. Political stability is not important for domestic financial markets only but global financial markets. Starting from the political movement, the Awakening of Arab or the Arab Spring, GCC region is considered as a region with political instability by international investors. This factor has seriously affected financial markets in this region (The Guardian, 2011). International Credit Rating Agencies changed ratings of economies such as Bahrain to insecure and highly risky markets because of high level of public debt and an ever increasing gap between revenues and expenditure. The outlook of Qatar was also affected due to blockade by rating agencies. After some months, International Monetary Fund reports stated that economy of Qatar is safe and it has not affected by the blockade (Crabtree, 2017).
In addition to political factors, economic factors also play an important role in globalization. As stated earlier, consistent decrease in oil and gas prices in international markets play role to shrink revenues of Gulf countries such as Saudi Arabia, Qatar, Bahrain, UAE and Kuwait. These countries relied heavily on exports of oil and gas products. Moreover, oil and gas industry is highly sensitive to fluctuations in international markets. Thus, the difference between revenue and expenditure increased which forced these countries to issue bonds in international markets to acquire funds from investors. Saudi Arabia is the largest exported of oil and gas products to global markets. The country has been affected heavily by the fall in oil prices. As a result, it has become the economy in GCC regions that has acquired billions of dollars through issuance of bonds in 2016, 2017 and 2018 to reduce gap between revenues and expenditures of the government. Same is the case with Kuwait and Bahrain. These countries are making efforts to diversify economy to attract investors. Qatar is diversifying economy through government’s support and its active economic policies to grow real estate, airline, transportation, health care and tourism industry. Reliance of oil and gas industry is a big strategic risk and threat of GCC countries.
Alternative Solutions to Reduce Risks
While GCC region is borrowing more from international markets to reduce budget deficits, there are many attractive opportunities as well. For instance, Qatar’s real estate market is the fastest growing market in GCC region. FIFA 2022 and Qatar National Vision 2030 to diversify economy are the two most prominent factors that are increasing infrastructure development projects in the country (Arabianbusiness, n.d.). Likewise, food and retail sector is also showing growth. Investors can invest in these countries through making use of diversification. Diversification is based on principle of not putting all eggs in one basket to reduce risk. Investors can reduce their risk through diversification of funds at different levels. For example, diversification of funds in different regions such as Asia, Europe, Middle East and US markets. Diversification in equity, bonds, derivatives and commodity markets. Investors can further reduce their risk through diversification in different industries and finally through investment in different companies within each industry. In this way, investors can reduce in risky assets and markets to earn higher returns at lowest possible risk.
Minimizing Risk in Qatar
Qatar is a home to many conglomerate companies such as Ezdan, Salam International, Zad Holding and Mannai Corporation. These countries make use of diversification and invest their funds in different industries through associates, partnerships and subsidiaries (Qatar Stock Exchange, 2018). Conglomerate companies are lesser risky due to diversification of business risk and financial risk. In the same way, investors can also reduce risk of their investment through diversification in health care, hospitality, consumer goods, transportation, financial and baking, and telecom companies. Moreover, investors can invest in different industries to reduce their risk of investment. For example, a portfolio comprising of real estate, conglomerate, and banking and telecom companies can help to reduce overall risk of investment.
Political and economic factors affect globalization of financial markets. GCC region is attracting lesser FDI than other regions because of economic culture and political risk. There is need to reduce political risks that are affecting political outlook and image of the region negatively. In addition, there is need to diversify the economy to reduce reliance on oil and gas industry. Infrastructure development projects, research and education can promote development of non-hydrocarbon industries. GCC countries are facing deficit in their budgets due to decrease in revenue from exports of oil and gas products to international markets. There is need to develop other sectors of economy so that they can contribute to economic development. GCC countries should also make their laws more flexible for international investors to attract more FDI.