Dubai stock market development and its effect on economic growthDocument Transcript
Dubai Stock Market Development And Its Effect On Economic GrowthIntroductionUnderstanding the financial market is very important to capture the economic policies anddevelopment of any country. Stock markets are essential as it helps companies raise capitalfor investment (Bose, 2001). It lists the company’s expectations about profitability from itscurrent prices. Now, since profitability is linked to economic activity, therefore, the activitiesin the stock market plays a very important role in analysing the economic growth anddirection of economy.Since the 1987 stock market crash, several studies have been conducted to understand thevolatility of the market (Woertz, 2006). The measure of risk is very important in the financialmarket and it is required by portfolio managers and investors. Financial institutions andregulators also require knowledge about the stock markets so that they can understand themarket risks.Since the second global financial crisis of 2008, global stock markets faced a lot of troubleand the Dubai financial market also had to face the music. Since the real estate bubble, thegovernment of Dubai was burdened with $59 billion on liabilities and its total debt reached$80 billion within a few weeks (Oxford, 2008). The importance of the financial market in theeconomic growth policies of any country has never been more emphasized. With the financialcrisis subsiding over the past year, the Dubai stock market once again tries to establish itself.This paper tries to analyse the impact of the Dubai stock market on its economic growth andthe various factors that has played a role in development of the economy.Dubai’s Stock Market Position
The United Arab Emirates (UAE) stock markets were set up in 2000 and the Dubai FinancialMarket (DFM) also started its operations in March 2000 (Bose, 2001). In 2005, DFM was setup as a public joint stock company (PJSC) and this market is being regulated by the EmiratesSecurities and Commodities Authorities (ESCA) (Oxford, 2008).Since its inception, the Dubai stock market has experienced tremendous growth and it hasbeen one of the driving forces in the financial market of UAE. Today, the Dubai stock marketregisters the largest volume of trading activity in the Saudi Stock Exchange. In 2007, PJSCshares were introduced to DFM at a price of $0.28 and on the first day itself the share valuerose to $0.61 (Oxford, 2008). This clearly showed the promise that the Dubai stock marketinstilled in the people.As of 2007 there were 57 companies listed on DFM and with a total market cap of around$360 billion (Oxford, 2008). 2004 and 2005 were the best years for the Dubai stock market asit was around this time that most of the business took place. Most of the companies listed inDFM are based in UAE and they traded heavily during 2004 and 2005. However, in 2006,there was a sharp decline in the volume of shares traded over the Dubai stock market (CARE,2009).Dubai’s Economic Growth PolicyInitially, Dubai was solely dependent on oil for any sort of business activity. However, withthe trade reforms of 1999, several foreign firms entered the Dubai financial market andplayed a significant role in developing the economy of Dubai (Bose, 2001). Today, realestate, financial services, petroleum and trade play an important role in the GDP of Dubai.Dubai contributes over 29% to the total GDP of UAE and it has turned out to be the bestservices sector amongst all the GCC countries (CARE, 2009). The most important sectorsthat contributes maximum to the GDP of Dubai are the real estate and construction sector,
which is almost 23% of the total GDP of Dubai. Trade and export contributes 31% whilefinancial services contribute another 11% of the GDP. The other sectors, including retail,contribute around 9% to the total GDP (CARE, 2009). Source: CARE, 2009Stock Market DevelopmentSeveral factors have contributed to the growth of the economy of UAE. One of the mostimportant factors has been the increased oil revenues and the low interest rates. The boom inthe real estate sector also helped in developing tourism and infrastructure of Dubai. This inturn increased the amount of foreign investments in Dubai. The Dubai stock marketwitnessed a substantial growth in activity during 2007 on account of large IPOs such as AirArabia, Deyaar and DFM (Oxford, 2008). Source: Woertz, 2006In 2007, the Dubai stock market showed strong operating growth and the three IPOs togetheraccounted for nearly 48% of the total traded activity in FY 2007 (Oxford, 2008). The
turnover ratio of traded shares in the Arab stock markets clearly shows that the Dubai stockmarket has performed better than most other markets (Sabri, 2008). Source: Sabri, 2008Today, the Dubai stock market is performing well due to the real estate boom and betterregulatory frameworks installed by the government.Companies Listed in the Dubai Stock MarketSome of the companies listed in the market include Ajman Bank (AJMANBANK), Tamweel(TAMWEEL), Dubai Investments Company (DIC), SHUAA Capital (SHUAA), ArabInsurance Group (ARIG), National General Insurance (NGI), Emaar Properties (EMAAR),Union Properties (UPP), Gulf Navigation Holding (GULFNAV), National Cement Company(NCC) and United Foods Company (UFC). There are several other companies from variousfields such as banking, transportation, telecommunications, real estate and construction(Woertz, 2006).Financial Crisis Impact
The Dubai financial crisis also affected the stock market. The main reasons for the downfallwere (Woertz, 2006): 1. Extreme volatility of the dollar as most GCC countries were dependent on the dollar. 2. Crash of equities and stock market in most of the countries also led to the stock market of Dubai. 3. Liquidity squeeze as a result of the global real estate crash affected the stocks. 4. Weak regulatory framework and inconsistent policies accompanies with lack of transparency in governance were other major factors behind the downfall.However, with the establishment of regulatory frameworks in Dubai, most of the effects ofthe recession have subsided. Today, Dubai stock market is once again booming with severalforeign investors looking to invest in this market.Impact of Stock Market on Economic GrowthThe Economic growth of Dubai has been achieved due to the developments in the financialmarket of Dubai. The main reasons behind the economic growth of a country and the impactof stock market (Levine, 1997) on it have been shown below:
Source: Levine, 1997Recent theoretical and empirical evidence suggests that the stock market has a long lastingeffect on the economy of a country (Garcia and Liu, 1999. The value of shares traded in thestock market helps us to analyse the effect it has on the economy of a country (Levine, 1996).The stock market of Dubai clearly suggests that it has a great impact on the economy ofDubai. The impact of the global recession did have some impact on the economy of Dubaibut with revival in domestic demand there has been a revival in the economy of Dubai. UAEis showing interest in lending money to banks located in Dubai and this could be very helpfulin reviving the economy of Dubai. Statistics from past research suggests that there is apositive relationship between stock market development (turnover ratio) and economicgrowth while inflation has a negative impact (Bose, 2001).Conclusion
In conclusion, it can be stated that the Dubai stock market has had a positive impact on theeconomy of Dubai. With new IPOs, there is possibility of high liquidity in the market. Thereal estate and construction market are sure to attract more sophisticated investor base in thelong term. In 2007, several regulatory frameworks were installed which adjusted publicofferings ceiling to 30% and these regulations would definitely instil faith in the investors(Oxford, 2008). Internationally, the global equities market will definitely increase theimportance of the Dubai stock market. Institutional investors have already started investing inthe stock market of Dubai and this is bound to increase in the future.Economic growth of Dubai has suffered due to the financial crisis but the government candefinitely avoid any further downfall by installing strict regulatory frameworks. ThoughDubai is under huge debts, the investors can be lured into the market by instilling confidencein them.ReferencesBose, Niloy. (2001). The Evolution of the Stock Market in Economic Development. Centre forGrowth and Business Cycle Research, School of Economic Studies, University ofManchester.CARE. (2009). Dubai Financial Crisis: Limited Impact on the Indian Economy. RetrievedDecember 11, 2011, from http://www.careratings.com/current/3/5769.pdfGarcia, Valeriano, and Lin Liu. (1999). Macroeconomic Determinants of Stock MarketDevelopment. Journal of Applied Economics. 11, 29-59.Levine, Ross. (1996). Stock Markets: A Spur to Economic Growth. (Finance andDevelopment Division, the World Banks Policy Research Department).
Levine, Ross. (1997). “Financial Development and Economic Growth: Views and Agenda”,Journal of Economic Literature. xxxv, 688-726.Oxford. (2008). The Report: Dubai 2008. Oxford Business Group.Sabri, Nidal. (2008). Financial Markets and Institutions in the Arab Economy. Nova SciencePublishers, Inc.Woertz, E. (2006). “GCC stock markets at risk”, Gulf Research Center. Working Papers,Dubai, March 2006.