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MARKETS - Bound for the Gulf

Qatar touts the advantages of an open, onshore market as it takes aim at rival Dubai’s financial free-trade zone.

There is one thing the Persian Gulf region has been unable to buy with its vast, oil-fueled purchasing power: a world-class financial market. Dubai and Qatar became players on the global exchange stage last year — primarily through Borse Dubai’s and Qatar Investment Authority’s investments in the Nasdaq Stock Market and the London Stock Exchange, respectively — but only niche exchanges have taken root in the desert.

Gulf governments are stepping up domestic investment in infrastructure and economic diversification, however. Those are ingredients of capital market development, and not coincidentally, Dubai and Qatar are racing for the regional lead. Dubai is clearly ahead: Its Dubai International Financial Centre has licensed more than 500 members since it opened in September 2004. The Qatar Financial Centre Authority has registered only 78 since its May 2005 start, but CEO and director general Stuart Pearce believes it can catch up.

“There are distinct differences between us and Dubai and in what those differences represent in terms of opportunity,” says Pearce, a Briton who took the post in August 2005 after retiring from an international banking career with HSBC Holdings. For one thing, he says, QFCA is a full-fledged onshore marketplace, with no separation between it and the rest of the economy. Participants in the financial market are free to sell into a virtually untapped personal financial services market consisting of Qatar’s native population of 907,000 — their 2007 per capita income of $70,754 is the second-highest in the world, according to the World Bank — and a comparable number of guest workers. The DIFC, by contrast, is a self-contained, 110-acre area within the emirate that’s geared exclusively toward international business; Pearce dubs it an offshore free-trade zone. DIFC officials reject that label, saying they seek to build a new link in the global chain connecting New York, London and Hong Kong.

Qatar’s soaring economy makes that onshore opportunity all the more attractive. The country’s GDP has expanded by an average of nearly 13 percent a year for the past four years, the fastest rate in the region and well ahead of the United Arab Emirates’ 8.75 percent. The government plans to invest $142 billion over five to seven years on education, port facilities and the massive natural-gas resources that drive its economy. That program alone guarantees business for banks and insurers in project finance, once they’re on the ground. Pearce also touts Qatar’s regulatory system. The QFC Regulatory Authority, the independent overseer of market participants, and the Qatar Financial Markets Authority, which supervises the stock exchange, follow the principles-based approach of the U.K.’s Financial Services Authority, as do Dubai’s regulators. Indeed, the QFC Regulatory Authority’s chairman and CEO, Phillip Thorpe, is a former FSA managing director who built the DIFC’s regulatory system before moving to Qatar in March 2005.

Qatar is making some headway. In January the regulatory authority granted a branch license to Industrial and Commercial Bank of China, making it the first Chinese bank with such an operation in the Middle East. Insurance giants American International Group and Zurich Financial Services have set up shop in Qatar, taking advantage of the right to sell locally everything from private health insurance and retirement products to Islamic insurance. And asset managers, which historically have served the Gulf from the U.K. or Switzerland, are taking a look.

“We needed one point of entry and went with Qatar,” says Joseph Pinto, director of Southern Europe and the Gulf for AXA Investment Managers, which, he believes, will stand out more in Qatar than it would in the more crowded DIFC.

Dubai and Qatar both may benefit as more of the Gulf’s assets are managed within the region, a trend that “is also going to benefit the region’s stock markets, listed companies and financial services industries,” says Tim Harrison, head of marketing for HSBC’s global banking and markets division in Dubai. Pearce agrees. “The presence of a number of countries in the Middle East developing their financial sector is a good thing,” he says.