Vous êtes sur la page 1sur 8

Dubai Stock Market Development And Its Effect On Economic Growth

Introduction Understanding the financial market is very important to capture the economic policies and development of any country. Stock markets are essential as it helps companies raise capital for investment (Bose, 2001). It lists the companys expectations about profitability from its current prices. Now, since profitability is linked to economic activity, therefore, the activities in the stock market plays a very important role in analysing the economic growth and direction of economy. Since the 1987 stock market crash, several studies have been conducted to understand the volatility of the market (Woertz, 2006). The measure of risk is very important in the financial market and it is required by portfolio managers and investors. Financial institutions and regulators also require knowledge about the stock markets so that they can understand the market risks. Since the second global financial crisis of 2008, global stock markets faced a lot of trouble and the Dubai financial market also had to face the music. Since the real estate bubble, the government 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 the economic growth policies of any country has never been more emphasized. With the financial crisis 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 and the various factors that has played a role in development of the economy. Dubais Stock Market Position

The United Arab Emirates (UAE) stock markets were set up in 2000 and the Dubai Financial Market (DFM) also started its operations in March 2000 (Bose, 2001). In 2005, DFM was set up as a public joint stock company (PJSC) and this market is being regulated by the Emirates Securities and Commodities Authorities (ESCA) (Oxford, 2008). Since its inception, the Dubai stock market has experienced tremendous growth and it has been one of the driving forces in the financial market of UAE. Today, the Dubai stock market registers the largest volume of trading activity in the Saudi Stock Exchange. In 2007, PJSC shares were introduced to DFM at a price of $0.28 and on the first day itself the share value rose to $0.61 (Oxford, 2008). This clearly showed the promise that the Dubai stock market instilled 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 as it was around this time that most of the business took place. Most of the companies listed in DFM 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). Dubais Economic Growth Policy Initially, Dubai was solely dependent on oil for any sort of business activity. However, with the trade reforms of 1999, several foreign firms entered the Dubai financial market and played a significant role in developing the economy of Dubai (Bose, 2001). Today, real estate, 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 best services sector amongst all the GCC countries (CARE, 2009). The most important sectors that 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% while financial services contribute another 11% of the GDP. The other sectors, including retail, contribute around 9% to the total GDP (CARE, 2009).

Source: CARE, 2009 Stock Market Development Several factors have contributed to the growth of the economy of UAE. One of the most important factors has been the increased oil revenues and the low interest rates. The boom in the real estate sector also helped in developing tourism and infrastructure of Dubai. This in turn increased the amount of foreign investments in Dubai. The Dubai stock market witnessed a substantial growth in activity during 2007 on account of large IPOs such as Air Arabia, Deyaar and DFM (Oxford, 2008).

Source: Woertz, 2006 In 2007, the Dubai stock market showed strong operating growth and the three IPOs together accounted 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 stock market has performed better than most other markets (Sabri, 2008).

Source: Sabri, 2008 Today, the Dubai stock market is performing well due to the real estate boom and better regulatory frameworks installed by the government. Companies Listed in the Dubai Stock Market Some of the companies listed in the market include Ajman Bank (AJMANBANK), Tamweel (TAMWEEL), Dubai Investments Company (DIC), SHUAA Capital (SHUAA), Arab Insurance 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 various fields 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 downfall were (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 of the recession have subsided. Today, Dubai stock market is once again booming with several foreign investors looking to invest in this market. Impact of Stock Market on Economic Growth The Economic growth of Dubai has been achieved due to the developments in the financial market of Dubai. The main reasons behind the economic growth of a country and the impact of stock market (Levine, 1997) on it have been shown below:

Source: Levine, 1997 Recent theoretical and empirical evidence suggests that the stock market has a long lasting effect on the economy of a country (Garcia and Liu, 1999. The value of shares traded in the stock 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 of Dubai. The impact of the global recession did have some impact on the economy of Dubai but with revival in domestic demand there has been a revival in the economy of Dubai. UAE is showing interest in lending money to banks located in Dubai and this could be very helpful in reviving the economy of Dubai. Statistics from past research suggests that there is a positive relationship between stock market development (turnover ratio) and economic growth 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 the economy of Dubai. With new IPOs, there is possibility of high liquidity in the market. The real estate and construction market are sure to attract more sophisticated investor base in the long term. In 2007, several regulatory frameworks were installed which adjusted public offerings ceiling to 30% and these regulations would definitely instil faith in the investors (Oxford, 2008). Internationally, the global equities market will definitely increase the importance of the Dubai stock market. Institutional investors have already started investing in the 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 can definitely avoid any further downfall by installing strict regulatory frameworks. Though Dubai is under huge debts, the investors can be lured into the market by instilling confidence in them.

References Bose, Niloy. (2001). The Evolution of the Stock Market in Economic Development. Centre for Growth and Business Cycle Research, School of Economic Studies, University of Manchester. CARE. (2009). Dubai Financial Crisis: Limited Impact on the Indian Economy. Retrieved December 11, 2011, from http://www.careratings.com/current/3/5769.pdf Garcia, Valeriano, and Lin Liu. (1999). Macroeconomic Determinants of Stock Market Development. Journal of Applied Economics. 11, 29-59. Levine, Ross. (1996). Stock Markets: A Spur to Economic Growth. (Finance and Development Division, the World Bank's 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 Science Publishers, Inc. Woertz, E. (2006). GCC stock markets at risk, Gulf Research Center. Working Papers, Dubai, March 2006.