x Abu Dhabi, UAESaturday 20 January 2018

Financial leader's scope to grow

Even its regional rivals recognise the attractions of the UAE as a financial centre.

Judging solely by the range of investment options, the UAE is the leading financial centre in the GCC. Karim Sahib / AFP
Judging solely by the range of investment options, the UAE is the leading financial centre in the GCC. Karim Sahib / AFP

Even its regional rivals recognise the attractions of the UAE as a financial centre.

In last year's Global Financial Centres Index, sponsored by the Qatar Financial Centres Authority, Dubai was the highest-ranking centre in the GCC area, with Abu Dhabi also scoring well.

Many financial professionals from Bahrain and Saudi Arabia in particular have paid the UAE the highest compliment as a place to do business by moving their operations here or opening large regional offices in the Emirates.

"The UAE is already the financial centre of the GCC," says Paul Reynolds, a Rothschild banker and the chairman of the Middle East Investor Relations Society. "Its economy is dynamic because it boasts a distinct competitive advantage as a place to do business and the market and regulatory environment plays its part in this."

Judged purely on the range of investment options, the UAE is the leader of GCC financial centres.

The country is the only one in the region to have more than one financial market, boasting three separate stock exchanges: two domestic markets, the Abu Dhabi Securities Exchange and the Dubai Financial Market (DFM); and the international market, Nasdaq Dubai.

Some believe the UAE's position in the regional financial rankings would be even stronger if the three markets were consolidated into one. "For foreign investors not familiar with the UAE, three markets causes confusion," says Peter Gotke, the vice president of Bank of New York Mellon's Dubai operations. "Liquidity is perceived to be diluted and oftentimes this is an excuse not to buy."

There have been attempts to consolidate the three UAE markets into one but, so far, with only limited success. The American investment bank Goldman Sachs has prepared a "road map" for unifying the exchanges but the plan has not yet been enacted. "It's partly a political decision waiting to be made, partly a question of getting the finance right. I've no doubt it will happen one day but it's hard to call a timetable," says one person familiar with the plans who asked to remain anonymous.

One of the leading proponents of consolidation is Jeff Singer, the former chief executive of Nasdaq Dubai who was recently appointed the head of the Dubai International Financial Centre Authority. Mr Singer has called for a "big bang" (the term given to the radical reform of the London markets in the 1980s) to help the UAE to consolidate its lead in the region.

There has been some progress towards unification. In 2010 Nasdaq Dubai and the DFM began to use the same trading platforms, custody, clearing and settlement arrangements but the three markets remain separate legal and functional entities.

One of the drawbacks of having multiple exchanges often referred to by critics is the lack of liquidity caused by dividing local and international trading into three segments. And liquidity remains a problem. Figures compiled recently by Saudi Arabia's National Commercial Bank show both Abu Dhabi and Dubai lagging behind, with some US$25 million (Dh91.8m) and $60m of average daily trading volumes respectively in the first half of this year. That compares with the Saudi Tadawul All-Share Index traded values of $2.47 billion per day over the same period.

The problem of liquidity is particularly acute on Nasdaq Dubai, on which only two stocks are traded in any quantity and only one, DP World, has any of the international cachet the market hoped to attract. Daily traded values run to a mere $1.66m in the first half of this year.

Despite the influx of business into the UAE since the turmoil of the Arab Spring, there has been a dearth of corporate activity, with mergers and acquisitions and initial public offering activity at historically low levels.

Other reforms would also make the UAE an even more attractive regional investment centre, experts believe. Foreign ownership restrictions, which place a maximum level of 49 per cent on the amount of equity an international investor can own of any one stock, act as a deterrent.

"Studies have shown that companies that increase foreign ownership levels see a positive effect on their share price," says Mr Gotke.