x Abu Dhabi, UAETuesday 16 January 2018

The year of lost opportunities

A general mood of unease among investors means that more must be done to attract investment to the UAE.

Moves to combine the Dubai Financial Market with NASDAQ Dubai will create a deeper and more liquid pool for investors.
Moves to combine the Dubai Financial Market with NASDAQ Dubai will create a deeper and more liquid pool for investors.

This will probably go down as a year investors in the UAE may wish to forget. In some ways, it may already seem like the year did not even happen. Thanks in large part to Dubai's decision last month to seek a delay in debt repayments by Dubai World, stock prices in Dubai are back near where they started the year. Equities in Abu Dhabi have fared little better, posting a gain of about 13 per cent this year.

These humble returns came amid an otherwise banner year in global markets. Signs of an economic recovery and large-scale borrowing and spending by governments trying to blunt the impact of the crisis have produced a boom in key markets. Stock markets in Asia have risen 60 per cent and more; the relatively staid Dow Jones Industrial Average has climbed by almost 20 per cent despite the worst US recession in 70 years. Even neighbouring Saudi Arabia's market has outperformed the UAE's, posting a gain of more than 30 per cent.

That investors are passing the Emirates by is undoubtedly a symptom of lingering concern over how debt strains in Dubai and slumping property prices will affect growth prospects. "Our investors aren't asking for exposure," said Dennis Phillips, the investment director at the private-wealth fund manager Ashburton. "There's a lot of uncertainty about how things are going to play out." Fund managers, consultants and bankers say it is also a sign that more needs to be done to make the nation's stock markets more attractive to the kind of big international institutions that rove the world in search of longer-term returns, including insurers, mutual funds, pension funds and sovereign wealth funds.

Moves to combine the Dubai Financial Market with the smaller NASDAQ Dubai are a step towards what analysts have said is a necessary consolidation of the nation's markets to create a deeper and more liquid pool for investors to put their money in. Many big funds will not invest in markets below a certain size on concern that the scale of their purchases will swamp the market and that trading volumes are too low for them to sell if needed without triggering an avalanche in prices.

In their absence, local markets are dominated by small investors, often individuals who buy and sell frequently, making them more volatile than even the smallest Asian stock markets such as Manila and Jakarta. That helps discourage companies from selling new shares. They tend to prefer having larger, longer-term investors who provide them with an important source of capital and remain there to watch their investment grow with the business, rather than cash out at the next market rally.

The lack of new listings in turn has left markets dominated by government-controlled banks and property companies that now face uncertain prospects. Investors say they would be more interested in stocks of services companies capitalising on robust regional demographic trends. Bankers also say equity sales are likely to become an increasingly important alternative to borrowing money from banks or investors. Companies in the Gulf have long preferred borrowing from banks to selling bonds, which requires more disclosure. Selling stocks requires not only opening their books but ceding some measure of ownership and management control.

Banks in the UAE are still rebuilding their balance sheets in the wake of the economic crisis, when depositors pulled out and property prices plummeted. With the outlook for property still weak, most banks are bracing for more loans to go sour and thus remain reluctant to make new loans. The cost of borrowing in bond markets is undoubtedly heading higher. Dubai's announcement that it was taking control at Dubai World and asking creditors for a six-month standstill on repayments will long be remembered for shaking confidence in the creditworthiness of UAE borrowers. In particular, investors and ratings agencies have abandoned long-held assumptions that government-owned borrowers could count on a bailout if they had trouble repaying their debts.

The cost of insuring US$10,000 (Dh36,700) of Dubai Government debt more than doubled to above $600. That rate has eased somewhat since Dubai announced that Abu Dhabi would provide it with $10 billion in new credit to help meet debt payments and pay contractors. It remains about 50 per cent higher than where it was in October, when increasing appetite among global investors for risk was helping to push down borrowing costs for emerging economies everywhere.

Since Dubai's announcement, that appetite for risk has receded significantly as concerns mount that heavily indebted governments elsewhere, such as in California and Greece, might also have trouble paying back investors. Those concerns have helped raise borrowing costs even for governments with no apparent credit strains, such as Abu Dhabi. The cost of insuring $10,000 of Abu Dhabi's debt has risen from less than $100 to more than $150.

Those trends indicate that it will be more expensive for the UAE to keep borrowing. For Dubai, that means refinancing its pre-crisis loans is becoming more expensive, pushing up its overall debt burden and the cost of servicing it. That may help explain Dubai's decision to restructure some debts rather than use borrowings from Abu Dhabi to refinance them. As it restructures, Dubai's companies will need to sell some assets to streamline operations and raise cash. That will require turning to equity financing.

With debt markets looking increasingly restrictive as risk appetite ebbs, local companies may also find themselves longing for more robust equity markets to which they can turn to finance growth. @Email:warnold@thenational.ae