After almost 20 years of discussions, the UAE looks set to have a properly regulated stock exchange by the end of the year. For bankers such as Khalid Kalban, general manager of Dubai Investments, who have campaigned for this since the early 1980s, there is still a whiff of unreality about it all. In the past, says Kalban: "Every time it looked like becoming a reality, something happened that stopped it."
However, it looks increasingly likely that an official exchange will finally be created and replace the volatile and unregulated over-the-counter market. Although no clear-cut schedule has yet been announced, legislation and a structure have been agreed, encouraging bankers such as Kalban to believe that the new structure may be fully in place by the end of the year.
This will not be a moment too soon. The UAE needs a well-managed, stable capital market if it is to make the most of the dramatic shift in policy whereby the private sector is now to take a dominant role in the UAE's economic development.
This in part reflects the mood swing across the Gulf that the state should act more as a regulator and less as an owner in the region's evolution. It is also driven by necessity. To limit the impact of the fall in oil prices, governments have to find ways to cut spending.
According to Sultan bin Nasser al-Suwaidi, the UAE central bank governor, the shifting of projects from the public to the private sector is needed for economic reasons. "Some government services are subsidized," he says. "While there was a reason for that two or three decades ago, the present living standards in the Gulf today are among the highest in the world. Shifting these services and projects to the private sector can save governments large sums of badly needed money."
He continues: "The government should not be involved in agriculture, mining, housing, communications, manufacturing, health and even higher education. The private sector is capable of undertaking and financing all kinds of projects in these areas and should use its potential to rise to the challenge".
Abu Dhabi, the largest and wealthiest of the seven emirates that make up the UAE, is using private capital to build water and electricity projects that previously had been the preserve of the state, and, in the longer term, will want to issue shares to nationals through the stock exchange.
Dubai has taken the lead in setting up companies to develop residential and industrial projects - these companies are both quoted on the exchange and keen to make strategic investments in quoted companies.
The persistent delays in establishing a regulated stock market have been caused by disagreements between Abu Dhabi and Dubai and also the fear, exacerbated by the Asian crash, that the UAE would become more vulnerable to international speculation. Although there is no agreement to allow foreign investors to own shares directly in the UAE exchange, it is accepted that this would follow sooner rather than later once a properly regulated exchange was established.
The increasing role of the private sector means that the UAE, like other Gulf states, has in the last five years become hungry for capital. Much of the region's wealth is still exported and invested in stable, better regulated markets in Europe and the US. Attempts to create regional equity funds, such as the Emirates Equity Fund, were initially successful but were then hit by the extreme volatility of Gulf stock exchanges.
According to one study by the Abu Dhabi Chamber of Commerce, the creation of a trading floor would "attract the savings of UAE nationals from abroad to be reinvested in the national economy. It would also contribute to the widening of the asset and ownership base".
The UAE has one of the largest and most dynamic equity markets in the Gulf but it is conducted over the counter among brokers located mainly in Dubai and Abu Dhabi. There are fears that, unless it is properly constituted, the market will develop, as it has in Saudi Arabia, as a country-wide electronic trading system without a much-needed regulatory framework.
The credibility of the UAE's over-the-counter market has suffered from the lack of a settlement, clearing and custody system. This, say bankers, has left it highly unregulated, devoid of transparency and subject to extensive manipulation.
The move to resolve this follows 18 months of erratic stock-market performance and growing concerns that additional damage could be done to local banks, investors and businesses. The UAE market has fallen more than 10% this year. This followed a year in which prices rose 51% in the first eight months - some stocks more than doubled in price - and then plunged 20% in two weeks.
Between the beginning of September 1998 and the end of the year, market capitalization fell from Dh181.9 billion ($49.6 billion) to Dh117 billion. Earlier that year the central bank warned that "the share prices of some companies are inflated and could not be justified by future expectations".
As the market fell, investor confidence disintegrated. Local banks were left with an estimated $820 million in bad debts, which, according to the Beirut-based Middle East Capital Group, prompted fears that the UAE could be heading for a crash similar to the 1982 Soukh al-Manakh crisis in Kuwait. Up to a third of all recent share offerings were paid for by investors taking out bank loans.
Towards an official bourse
Evidence of the government's determination to ensure that this could not happen again came this July with the announcement that the official stock exchange would be based in Abu Dhabi and be linked electronically with floors in other emirates.
Formal legislation is awaiting final approval following the agreement on a draft law by the cabinet in November last year. Bankers say that the main benefit of the legislation, which will establish the exchange as a federal entity, is that it will make abuses of the system much more difficult.
The exchange's monitoring authority will be financially and administratively independent and separated from the market operators. Trading will be limited to licensed brokers, dealing from trading floors linked by computer systems.