UAE 'should rescue stock markets'

25/08/2010 00:00 AST

The UAE government should come to the rescue of stock markets, which are facing a liquidity crunch, low volumes and muted investor activity, by pumping in government and pension funds, said a top official of Daman Investments.

"Markets need artificial support as levels of liquidity are quite low. Government and pension funds should be invested to boost stock markets," Daman Investments Chief Executive Officer Shehab M. Gargash told Arab News.

The daily average turnover on UAE bourses - the Dubai Financial Market and Abu Dhabi Securities Exchange - is put at $121 million this year, down from $266 million.

The number of equity brokerage firms are shrinking due to a sharp decline in trading volumes and tough market environment, forcing smaller entities to merge with bigger ones or shut their operations altogether, he said.

According to Emirates Securities and Commodities Authority, the total number of brokers in the UAE is now down to 70 from a peak of 120 in 2008.

"Scarcely a day seems to pass without some brokerage either closing down or suspending their market activities due to illiquidity," Gargash said.

On the merger of bourses in the country, Gargash said: "It is more likely to happen now than earlier due to the ongoing financial turmoil. The move will make the market more liquid."

Referring to the $109 billion Dubai debt, he said: "Investors need clarity on Dubai debt repayment plans whatever it ends up looking like. ... The inability thus far to reach this milestone has deepened the 'bad credit' profile of the UAE."

"There is a need for a coherent strategy to be articulated by the government as to how it intends to deal with this situation," he added.

The UAE banking sector, which is one of the main drivers of stock market performance, is coping with lower margins and increasingly higher credit costs due to low interest rates as deposit growth continues to remain in negative territory.

"However even in the worst case scenario, the UAE government would never allow the banking sector to collapse," he said.

According to a report issued by Daman Investments, the UAE witnessed the biggest contraction within the GCC in foreign direct investment (FDI) last year. The country recorded 72 percent drop in FDI to $40 billion in 2009, whereas the GCC's FDI fell 16 percent to $520 billion during the same period.

"Anemic growth, liquidity concerns, a highly publicized real estate crash, high borrowing rates and slower government development activities have all contributed to the sharp drop in FDI activity in the country," said the report "The UAE Economy at a Crossroad".

However, the deterioration in "Dubai's economic health has been highly exaggerated. The economy may be facing a sharp decline but it is far from dead and do require right medication", Gargash said.

Arab News