A Formula for Economic Stability

The increasing number of initiatives to create public shareholding companies represents a quantum leap in the economic life of the United Arab Emirates. The long-awaited announcement of plans for the opening of a stock exchange represents the endorsement by the UAE government of the trend. Local firms will now be under pressure to go public in order to not only access a new capital market, but to gain credibility in the globalizing international economy.

We believe that this trend is very positive. Public shareholding is the only option available for the private sector of the UAE to grow beyond the limited scope of the existing family and sole proprietorships which have thus far dominated the first decades of our economic rebirth. It should be realised though that the transformation which will be caused by increased public shareholding will not happen overnight. It must managed carefully and in harmony with the overall economic, social and intellectual evolution of our society.

These changes could not have happened twenty or even ten years ago. Likewise, it would have been impossible for such public offerings to occur due to directives from above. The trend actually represents the current state of health of the UAE development process. The organisations which have survived the economic ups and downs of the past two decades have proved their management capabilities. And it must be said that survival has often reflected the considerable expertise accumulated over generations by the merchant families of the Emirates.

The move towards public shareholding is an economic milestone in the development of the UAE. The trend is based on the maturation of previous phases. It is imperative therefore that both the public and private sectors safeguard the phenomenon by implementing strategies which will promote the prosperous expansion of public ownership. The initial public offerings (IPOs) of shareholding companies in the Emirates have been quite successful thus far. Each offering has garnered a response rate of subscription which far exceeded the amount of capitalisation required. It is prudent therefore to consider the following.

The tremendous response rate indicates a general and positive interest in share ownership by the public. The repeated enthusiastic responses to IPOs serve as a survey of savers' interest to invest in local companies with a solid financial base. We can infer that these investors want to benefit from the advantages of liberalising our local economy.

The response rate to the IPOs is testimony to the purchasing power of our society. The magnitude of the liquid capital available reflects the economic stability of the UAE, which is the direct result of the sound economic policies pursued by our government since the establishment of the federation 26 years ago. Our business sector has grown and flourished without the government having to resort to protectionist policies, and its success can be attributed in large measure to competition in an open business environment.

The subscription rate also indicates confidence by local investors in the future of our economy. Where a man puts his money is a real indication of his hopes and fears. In this case, it seems, much hope and little fear.

Last but not least, the response rate reflects a mature investment trend. Savers in the UAE evidently want to diversify their portfolios across several economic sectors rather than following the more risky policy of putting all their eggs into one basket.

Decision-makers in both the public and private sectors of the UAE should consider the implications of the shareholding trend. We need to ensure the stability which will act as protection and insurance against the negative macro-economic forces which will constantly threaten the gains which we have achieved.

In the context of the recent IPOs and the positive subscription rates, there is actually little alternative to the establishment of a stock exchange. The institution will not only provide a forum for trading, but will also function to regulate the new market and to guard against unethical or unsound practices which would undermine the stability of the UAE economy.

The stock exchange will feature bodies which will specialise in management analysis, classification and control. The market will establish procedures for corporate transparency, and will ensure that there is accurate disclosure about the vital statistics of listed companies or new IPOs. For example, the stock exchange will issue quarterly reports summarising the economic data of listed companies, compiled through standardised procedures.

The establishment of the stock market will broaden the participation of the public in equity ownership. The trust which each investment represents cannot be squandered. The management of each listed company must function in such a manner to maintain the confidence of the shareholders. One consequence of this oversight is to force management to abide by sound principles. The scrutiny functions as an incentive to perform to a higher standard.

The number of stock markets throughout the Arab world is increasing steadily, and they are beginning to maintain open channels to each other. These markets are recording considerable capital growth rates due to steady expansion in the number of stocks listed, and due to the increasing willingness of Arab investors to bring their money home. It's high time for the Emirates to benefit from this trend with a formal equity trading institution.

The anticipated opening of the Emirates' stock exchange will of course not only be limited to IPOs of new enterprises. The existence of the market will encourage established local corporations, even the large family-owned enterprises, to consider raising capital by issuing shares. This in our view will serve several purposes.

From the point of view of the nation, the trend of widening equity ownership will increase general awareness of economic issues. It will bring locally owned capital home to let it work for the future of our economy. From the point of view of the local enterprise, the requirement of transparency and the responsibility of reporting to shareholders will improve management performance.

The establishment of the UAE stock exchange will also foster the creation of a locally based investment industry. These specialised organisations will play a crucial role in developing and maintaining the links between an expanding pool of investors and the management of the listed companies. The investment companies will also offer objective reporting on economic data, and will have to function according to internationally acceptable criteria. Such activities can only be healthy additions to our national economic development.

The economy of the United Arab Emirates has achieved an amazing record of progress in the quarter century since the establishment of the federation. Under wise leadership, economic policies have been implemented which have created a liberal market environment. A sophisticated national infrastructure has been created at enormous cost. The private sector has thrived. The trend of successful stock offerings will now be consolidated by the establishment of a national stock exchange.

The success of the IPOs demonstrates the potential of the planned market to attract home the surplus capital of a potentially wide investor class. Local establishments must now consider the option of transforming themselves in order to gain access to a new source of capital. In addition there is the logic of improving management procedures.

There is yet another important rationale for local enterprises to issue shares. The process will in effect return something to the country which has asked relatively little of us.

The wider the circle of Emirati citizens which benefit from equity ownership in our strong economy, the more stable and prosperous will be the future of our young nation.