Stock Market Development in Qatar Economy - Essay Example

Effects of Stock Market Development in Qatar Economy Introduction Stock market as a termis normally used to refer to a special organized market where shares and bonds are normally traded. The market reacts differently to different socio-economic, political or economic influences. The stock prices of quoted companies in the stock market are normally affected either positively or negatively by certain factors which can be within or without economic boundaries. Factors such as interest rate and inflation rate have an inverse relationship with the stock market development. However, GDP has a positive relationship with the stock market development in that, an increased in GDP increases the performance level of stock market. Several microeconomic factors such as dividends, profits, and business growth among others act in a direction to explain the returns from the stock market. On the other hand, the overall return is explained by macroeconomic factors that affect the performance and the development of the stock market. Such factors include the consumer price index (CPI), inflation rate, gross domestic product (GDP) deflator, inflation and among others. This paper will discuss the effects and roles of the stock market development on the Qatari economy. It will also try to explain certain macroeconomic issues such as GDP, inflation and consumer price index, and their effects on the performance of stock market (Asogu, 1991). How Inflation affect Stock Market Performance Inflation is an economic situation where there is excess supply of money with few quantities of goods that need to be purchased. This phenomenon normally provides that, a small quantity of goods and services are purchased at very high prices. This situation results most of the time in no growth in a country’s economic output. The factors that normally influence the occurrence of inflation include such factors as, increase in money supply, decrease in supply of goods, increase in demand for goods, as well as a decrease in the demand for money. Other factors that also contribute to this effect include a decrease in the aggregate supply that will cause an increase in the wage rate and an increase in the prices of raw materials, hence causing inflation (Adrangi, Chatrath, & Sanvicente, 2002). A lot of people in the economy including investors, consumers, producers and even the government are affected badly with inflation. This is because, when the rate of inflation is high, money loses its value, so a smaller basket of goods can be purchased by a very huge amount of money. There is then too little that one can do in terms of development and foreign investment when the inflation rate of a country is high. It is believed that inflation bears a positive influence on common stocks. This is so because the shareholders tend to earn more money for their goods and services when they sell them during the time when there is a high inflation rate in the market. This gives a positive relationship between a inflation and the stock market prices. When one therefore tries to assess the impact of inflation on the stock prices performance, there is a positive relationship which is achieved between the two. Gross Domestic Product (GDP) Economists measure economic growth in through the use of an increase in the size of the economy of a nation. Gross Domestic Product is a widely used measure of an economic output. The term is normally used to refer to the total value found from the final goods and services that are produced within a country’s boarders within a given year. When measuring GDP, normally the ownership of a particular goods and services are not normally considered. The measure however considers the only the final goods and services that consumed by the final user but not those goods and services that were used as inputs in the production of other goods and services (Chen, Roll, & Ross, 1986). Researchers have found out that there lies some relationship between the stock prices and the future growth of the real GDP (RGDP). Two explanations exist to prove this fact, and the first explanation is the one that states that, there are changes in information that might occur in the future about the RGGDP, and such changes in information can change today’s prices in the stock market. The changes in prices can be to increase the prices or to decrease the prices. The second explanation follows that, changes that occur in the stock market prices, not considering so much the causes of such changes, will definitely affect the cost of borrowing by firms in the stock market. This will then cause either a positive or negative replication in the economy I that, when the stock market prices increase, the cost of borrowing becomes unmanageable while when the stock market prices reduce, the cost of borrowing in the market reduces and becomes favorable to the investing firms. This phenomenon will affect the firms in that, a low RGDP will cause the stock prices to increase hence raising the cost of borrowing which then makes it hard for many firms not to be able to afford to borrow funds for investment. This then makes the investment level in a country to derail following the fact that many firms will not have access to the capital for investment given the high cost. This stumps back to the economy where there will be little growth in the economy due to fewer investments that will again lead to low savings, hence high level of dependency. Consumer Price Index (CPI) Consumer Price Index (CPI) also becomes an economic indicator that has been widely used and quoted in various economic for a. it is used as a measure of the changes taking place in the prices of goods and services that a consumer purchases on a daily basis. CPI is also referred to as what consumers pay for a given basket of goods and services they purchase on a daily basis. Many people have come to associate CPI with inflation since the two have a direct relationship. This means that, when the rate of inflation increases, it follows without saying that the rate of the consumer price index must also increase. This happens so as we use inflation in the calculations of the CPI. Actually, any value of the consumer price index found or calculated by the bureau of statistics normally must be adjusted to the current value or rate of inflation in the economy. This is because, inflation influences so much what we purchase, how much we purchase and how much we use to purchase what quantity of basket of goods. The consumer price index helps us to understand the conditions in the stock market, hence the conditions in the economy in that, when there are difficult economic conditions in the stock market that might be caused by high rates on inflation and interest rates charged in the market for borrowing, the consumer price index will not be favorable definitely. This will mean that consumers will have to pay high amounts of money for small quantities of goods and services. The daily basket of goods to be purchased by the consumer will cost higher than the same basket would have caused during the times of favorable economic conditions in the same market. It is therefore advisable for a country to implement any investment plans that are geared towards promoting diversification so that there is much security in the spread risk to curb the situation (Burmeister & Wall, 2009). Explanation and analysis The Qatar State Economy Qatar is a country with a rich GDP of 103.211 per capita which is said to be boosted so much by its rich oil and gas deposits. The country has a small population of 1.8 million people only, a factor that also explains the high rise in the GDP per capita. The GDP can also be translated to $183 billion per year, which is estimated to be about 0.3% of the world’s GDP. It had a growth rate of 6.6% in 2012, which was a 5-year compound growth rate of 13.1%. It is also very amazing that the rate of unemployment is only 0.5% with an inflation rate of only 1.9% in 2012.the oil and gas deposits in this country has seen the country being rated one of the fastest growing and higher per capita countries. Since 2008, the increase in oil and gas deposits has been on the rise, hence helping to build the state’s budget and economy (Basher & Sadorsky, 2006). Another very amazing thing worth noting about Qatar’s macroeconomic indicators is normally the fact that, they keep on getting better each year. This economy’s growth is normally contributed majorly by its oil and gas sector. However, there is also a greater contribution to the economic development level brought about by the development in the stock market of Qatar. According to recent statistics, the consumer price index was reported to be 117.20 index points in April 2014, form the last record of March the same year which was 116.90 index points. In 2009, the CPI was recorded to be 110.66 index points and this stayed around this value up to around 012. It is said that, Qatar recorded the lowest CPI of 106.60 index points in 2012, according to the report given by the Qatar statistics authority. This, to the stock market, is a gain of value as shareholders would get high prices for their goods and services, hence high returns in the stock market. This would in turn give a positive growth in the economy in that, the investors would have adequate capital to invest, bringing more goods and services close to the consumers, hence raising the living standards of people in the economy. The government would also gain by collecting more revenue in terms of taxes from the increased number of investors, hence use the funds to provide better services to the citizens of Qatar. With good infrastructure, high quality social amenities, better, good and affordable education as well as quality and affordable healthcare services that would be provided by the government to its people would translate into higher and better standards of living, hence developed economy. On the other hand, the GDP deflator that was recorded in 2009 was 201.60 index points while this reduced to 200.6 in 2014. The World Bank also recorded a rise in the Qatari’s GDP for several years. In 2012, he GDP was $183.38 billion which represented 0.3% of the world’s total GDP. These are actually signs of the development level of the stock market of the Qatar. a well developed stock market on the other hand contributes to the development of an economy. This is because, with high GDP, it means the stock market prices are favorable which then reduces the cost of borrowing in the Qatar stock market. This has made investors in Qatar to be able to access borrowing easily. With adequate borrowing, there is enough capital for investment in the economy, hence, the country’s economy becomes again in the rise. That therefore explains one of the factors that has made the economy of Qatar to experience high growth. The table below shows some of the statistics of the macroeconomic indicators in the economy of Qatar. Prices Last recorded Previous recorded Highest recorded Lowest recorded Recording unit + Consumer Price Index 117.2 116.9 117.2 106.6 Index points + GDP Deflator 200.6 202.6 209.8 48.70 Index points + Inflation 2.8 2.6 16.59 -9.96 percent + In conclusion, there is much influence that macroeconomic indicators such as GDP, CPI, inflation rate as well as the interest rate, have on the performance of the stock market. These either increases or decreases the economic conditions of the stock market. In return , the stock market has its influence on the development of an economy. Qatar is such an economy that has experienced better and favorable macroeconomic indicators which in turn increases the development level of its economy. It is a well developed economy, with high GDP, low inflation and low unemployment rate. There is much influence to this development caused by the development of the stock market. References Adrangi, B., Chatrath, A., & Sanvicente, A. (2002). Inflation, output and Stock Prices:Evidence from Qatar. Journal of Applied Business Research, 17(1), 61-76. Akbar, Y. H., & Samii, M. (2005). Emerging markets and international business: A research agenda. Thunderbird International Business Review, 47(4), 389-396. Asogu. (1991). Financial Investment Oportunities and the Macroeconomy. Journal of Finance, 529-554. Basher, S. A., & Sadorsky, P. (2006). Oil price risk and emerging stock markets. Global Finance Journal, 17, 224-251. Burmeister, E., & Wall, K. D. (2009). The arbitrage pricing theory and the mcroeconimic fctor measures. Financial Review, 21, 1-20. Chen, N. F., Roll, R., & Ross, S. (1986). Economic forces and the stock market. Journal of Business, 59, 383-403. Read More