UAE capital markets and Dubai

With $18 billion worth of real estate under construction over the next two years, Dubai is beginning to realize that its ambitions to become a regional financial hub might well start at home.

For the traditional financial model that has served Dubai well for more than two decades - of government pump-priming for the private sector - is looking a bit stretched. Such is the scale of investment today that something more like a modern bond and equity market will be required.

Step forward the bold and ambitious Dubai International Financial Centre. Although the ink is not yet dry on its federal decree, the DIFC is already beginning to look like the cornerstone of the new Dubai.

In particular, the new regional stock market, the Dubai Regional Exchange will be ideal for raising capital. It should not be forgotten that Emaar Properties, the largest Dubai real estate company, was a UAE stock market IPO in 1997.

Moving forward, the DRE will provide a platform to allow the part privatization of Dubai state-owned companies to raise new capital for expansion, and to provide the Dubai Government with the money for its infrastructure investments.

Likewise a Government and corporate bond market can also be developed within the DRE. Bond issues spread risk and deepen local capital markets, while soaking up excess liquidity.

The main barrier is a reluctance to provide proper transparency and the full disclosure of financials. There are ways around this, such as the dirham-denominated bond issues that have already taken place. But to attract international interest, legions of accountants must be allowed to structure financials into a shape that comply with global standards.

Without such developments Dubai could find itself with a huge budget deficit, something the emirate has always managed to avoid in the past, despite its rapid economic growth. Present liabilities amount to a $232 million loan due at the end of 2004 and $409m worth of five-year bonds issued last May.

It really is remarkable that so much has been built in Dubai with so little debt to date. But this situation looks as though it will have to change now.

Yet viewed in a positive light this is an opportunity and not a threat to Dubai. By using the DIFC to solve its own funding requirements Dubai will kick-start yet another new industry, the financial services sector, the richest prize for any regional economy.