Curing the liquidity problem of the UAE bourse

The UAE stock exchange has been a qualified success. A little over two years ago and there was no public trading floor at all. The market was entirely conducted over-the-counter, and very few shares changed hands.

Today the UAE has two trading floors, one in Abu Dhabi and one in Dubai. But trading volumes are terribly low.

Last week an article in Gulf News pointed out that trading in the Kuwait Stock Exchange totaled USD2.9bn in June, while trading in the UAE bourse was a mere USD82m. Indeed, trading so far in the UAE for the whole of 2002 is only USD580m, far less than a single month on the KSE.

And that despite the fact that the market capitalization of the UAE stock market is bigger than the KSE. However, the UAE authorities are perfectly aware of the problem. There will shortly be new stock exchange floors in Sharjah, Al-Ain and Fujairah to encourage wider share ownership.

But the main hurdle to overcome is that large percentages of UAE listed firms' equity are held by the government or by families that refuse to sell their shares. No shares for sale means low liquidity. No trading means that a false market can exist in certain shares whose price may not reflect their underlying value.

This is not a healthy situation for a dynamic, booming economy like the UAE. Some firms, most recently the National Bank of Abu Dhabi, have moved to split their shares as a way of boosting liquidity. But more needs to be done.

More shares need to be put into the market. The government can do this by selling part of its share holdings to the public. Most governments sell off shareholdings because they need the cash. The UAE certainly does not need any money to support its excellent public finances.

But by reducing state shareholdings in key sectors such as telecoms and the banks, the UAE government would assist in the creation of a more liquid stock market that would be good for the long term diversification and health of the local economy.

Of course, the market should not be flooded with new shares that would be dangerous. But the phased release of new equity into the UAE bourse would be an excellent way to speed up the development of local capital markets. And better capital markets would be good news for everybody.