On economic prospects and capital market challenges
Mohammad Al Murtada Al Dandashi, Partner & Managing Director, Al Ramz Securities, on economic prospects and capital market challenges.

Despite the international volatility since 2008, the UAE has managed to sustain its economy and even emerge in stronger shape in various fields. High oil prices, solid infrastructure and cohesive socioeconomics, among other factors, have helped the national economy continue its long-term growth.

The UAE is a safe haven for foreign direct investment (FDI), as well as a business centre for those interested in the Middle East and North Africa. It has witnessed remarkable growth in inflows from abroad and money supply since the start of the Arab Spring.

Flourishing non-oil industries, supported by the developing knowledge-based economy, are gaining substantial momentum. A growing population and Abu Dhabi’s Economic Vision 2030 all point to evolving business opportunities in the near future. In that respect, the Department of Economic Development has recently confirmed that GDP may grow 3.9% in 2012 to around Dh750bn ($204.15bn), followed by an average annual growth of 5.7% through 2016. Meanwhile, Abu Dhabi received about Dh3.5bn ($952.7m) of FDI in the first five months of 2012, and that is expected to more than double after major projects are completed.

Needless to say, expanding businesses require efficient channels of finance, including credit facilities, as well as capital markets. Both debt and equity instruments are utilised in different stages of the business cycle, but there are some challenges that currently restrain our equity markets from growing.

Oil and gas activities represent more than 45% of Abu Dhabi’s GDP, followed by construction and contracting, which together contribute some 12% to prospective GDP. Real estate is expected to form about 8.8%, while financial services are estimated at 6.1%.

On the other hand, the stock exchange is structured very differently, with over 30% of market capitalisation represented by Etisalat. The biggest two banks, National Bank of Abu Dhabi and First Gulf Bank, make up 26%. Developments in the credit market and money supply are fairly represented by the stock prices of listed banks. The same applies to real estate development, utilities and telecommunications, but other vital areas of the economy are not being equally mirrored.

Moreover, the Abu Dhabi Securities Exchange’s (ADX) market-capitalisation-to-GDP ratio is estimated at 30%, compared to over 60% for Saudi Arabia and Qatar. These figures suggest that stock market indices neither offer a good gauge of economic sectors nor represent an efficient leading indicator to adopt. In fact, the absence of listed petrochemicals companies, media players and educational services causes the general index to lag behind the actual macroeconomic performance.

Having said that, we strongly believe it is worthwhile to map a strategic plan that paves the way for private companies to go public. Of 64 companies listed on the ADX, 41 are partially open to foreign and GCC ownership (limited to 15-49%), while 23 companies are open only to nationals. Total market capitalisation of ADX’s listed companies was Dh249bn ($67.8bn) as of late September 2012. Consequently, the maximum market value that non-UAE traders could hold is around Dh45bn ($122.5bn), representing 18% of the entire market (it does not currently exceed 5%). This limitation is cut further down when we adjust to free-float rates.

We strongly believe that decision-makers endeavour to allow short-selling and activate the function of market-makers, which will have a tremendous impact on the market’s level of activity. Authorising margin trading was a commendable milestone. These concepts are deemed to be essential requirements for institutional players to perform well in any market, especially hedge funds and investment banks whose mandates include developing structured products. They also help reduce the risk perception of illiquidity and form a counterbalance for highly leveraged purchases. We, therefore, hope that decision-makers will expedite the process of introducing these instruments as soon as possible. And finally, we must emphasise the importance of having an active bond market to facilitate the management of capital structures, as well as business expansion.

Source: Oxford Business Group.