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THE FUTURE OF THE FX MARKET IN THE GCC

By Mr. Majid Jalali, CMS Broker LLC

The Middle East has long been a major epicenter of trade and commerce, nestled between West Asia and Eastern Europe. The region has vastly transformed from the days of the Silk Road but maintained its importance due to its geographical location as a hub for business interest for the east and the west. The commercial history of the region has certainly left its mark on the people whose mercantile culture dates back centuries.

Majid Jalali CEO
Majid Jalali CEO

With its rapid growth from a scattering of sleepy ports into modern metropolises, the UAE has now established itself as the commercial capital of the region, with Dubai playing a leading role. Originally from Delaware, CMS established its presence in the UAE a decade ago, seeing the opportunity to tap into the regions nascent forex market.

The UAE being the initiator of this regional transformation due to its leader’s grand ideas, vision and fearless attitude, making a land of few into many and plenty. Where the rest of the world was overwhelmed with the confusion of what made exotic into toxic, the UAE was on its way to concur many heights.

With the realization of the economical cycle curve differential between the emerging and frontier markets and historical evidence that such trends eventually converge usually with a lag which depicts a gap for new market entrants, made being present in the region not just a good idea but a must.

10 years on CMS is benefiting form its decision and projecting to do so as the local market is far away from its saturation point. The financial market swings have taken its toll on investors, however, the regions positive GDP growth, higher than normal earning per capita and most recently with the economic growth estimated to reach 4.3 percent in 2012. Hydrocarbon production expanded by around 5.2 percent, and non-oil growth continued to accelerate to 3.8 percent, driven by growth in the services sectors. Backed by high oil prices and production, as well as buoyant non-hydrocarbon exports, the external current account surplus at around 17 percent of GDP. The region’s economic indicators certainly support our confidence.

Another major marker that any business should pay attention to is the economy’s ability to diversify from primary drivers of its GDP growth, in this case revenues generated by oil exports, Dubai and UAE’s non-hydrocarbon exports recorded high growth rates, despite a significant decline in bilateral trade with Iran (down 31 percent year-on-year in 2012). Inflation remained subdued at 0.7 percent on average. However, progressive economic data is one side of the formula, in the recent years, there has been a great shift within the investment community who has swayed away from the less sophisticated old school trading mentality, with the advances in technology, mobile capabilities and state of the art business infrastructure along with the government advocating the importance of higher education and plenty of cross over in terms of human resources, expertise and knowledge, from the more mature markets such as Europe and U.S. , the Middle Eastern market participants have really done something to blow their trumpet about. These cohort are not solely comprised of institutional investors, but mostly the average individuals who have grown up with the mentality of trade through generations from a wide array of demography men, women, local, Ex-pat, young and old with various income levels and majority trading the volatile Forex markets. You can spot them in the shish cafés on their mobile devices puffing away, drinking their mint tea and trading, giving the major banks a run for their money in term of trade volume, a major societal force in the online brokerage industry.

According to an article on National News Paper (a local paper in the UAE) there are in excess of 200,000 retail traders in the MENA and growing exponentially. CMS, as one of the older brokerage houses in the UAE have definitely witnessed this trend and are continuing to do so. We were also lucky in a way that we took a risk and set foundation prior to this boom as the legal and regulatory frame work in the region has started to become more rigid recently in term of equity capital requirements to obtain licenses and having access to bridges for the local centralized exchanges such as DGCX (Dubai Gold and Commodities Exchange), who offer OTC access to exotic currency pairs such as INR/USD which makes around 10 – 15% of our daily trade volume, due to the dominance of Indian businesses and trade ties of UAE to India. However, when there is a will there is a way, as an adjacent activity to our core activity as broker we are able to assist businesses who are willing to enter the GCC markets by providing them a thrifty white label solution and helping them curb the initial expenses

As for the future, we are very optimistic that the economic recovery will continue to strengthen due to favorable oil prices and capital inflows. Supported by a perceived safe haven status due to the regional political and social unrest, capital flows have strengthened, demand from expatriates from the broader region has increased, and the real estate sector, which had been impaired since the 2009 crisis, has stabilized, and economic confidence strengthened.

We do foresee that the GCC will continue to benefit from economical growth on long-term basis and with the traders becoming more sophisticated and technology savvy, the regulator’s hard work to advocate more relaxed yet diligent framework and raising the bar in terms of better management of unsystematic risk, service provider’s standards and conduct are encapsulated to encourage opportunity within the financial services industry in the region.