New products along with the promise of an expanded bond market could herald an era of fresh dynamism for Dubai's capital markets, despite their difficult time of late.
Currently, the emirate is almost spoiled for choice in its capital markets, with two main exchanges for bonds and equities, along with the Dubai Gold and Commodities Exchange, which trades in commodity derivatives, and the Dubai Mercantile Exchange, which trades in energy and commodities.
The emirate's oldest exchange is the Dubai Financial Market (DFM), which started operations in 2000 to provide a market for investors to buy and sell the stocks of publicly held companies in the UAE. As of the beginning of March, the DFM had 65 companies listed on its boards, while also conducting bonds, Islamic sukuk and mutual funds trading, though at a low volume.
The other main equities exchange is the Nasdaq Dubai, located within the Dubai International Financial Centre (DIFC). The exchange, which opened in 2005 to trade in both local and overseas equities, was re-branded in November from the Dubai International Financial Exchange (DIFX), with the name changing to its present form. The move was a reflection of the market's close links with the Nasdaq OMX Group, the world's largest exchange company, which owns a one-third stake in the exchange.
The name change, as well as Nasdaq OMX's initial buying into the DIFX in February 2008, was also a reflection of the further internationalisation of Dubai's capital markets. Firms trading on the US Nasdaq and Scandinavian OMX exchanges now have the opportunity to cross list in Dubai.
Both Nasdaq Dubai and the DFM are controlled by Borse Dubai, the state-owned holding company established to consolidate the management of the two exchanges as well as investments in other exchanges. The company itself made capital market headlines in mid-February when it closed a fully subscribed $2.5bn (Dh9.1bn) syndication to refinance part of its $3.78bn debt, which had been set to mature on February 28.
The Nasdaq Dubai is regulated by the Dubai Financial Services Authority (DFSA), which is the independent body charged with overseeing all of the financial and ancillary services within the DIFC. Both the exchange and the DFSA work closely with the federal Emirates Securities and Commodities Authority as well as the UAE central bank.
Though Dubai's capital markets have experienced a sharp downturn over the past year, with the DFM dropping 72.4% in 2008 and the Nasdaq Dubai also sliding, it is hoped that these losses have bottomed out and that new developments will help regenerate the financial sector.
One such development occurred on March 2 with the launch of a new sharia-compliant tradeable security, backed by gold and to be traded on the Nasdaq Dubai. The securities will be marketed by Dubai Commodity Asset Management, a unit of the Dubai Multi Commodities Centre (DMCC).
According to Ahmed bin Sulayem, executive chairman of the DMCC, the new securities trading will open up fresh opportunities for investors.
"Dubai Gold Securities will establish a benchmark for investors looking for innovative solutions to invest in commodities within the framework of Islamic finance," bin Sulayem said at the launch of the security.
The capital market had received a boost in mid-February, when the Dubai government announced it was launching a $20bn bond to fund its financial obligations and press ahead with development projects. On January 10, the government released details of its budget for the forthcoming year, which included its first-ever projected deficit, a shortfall of $1.1bn, as well as a 42% increase in public spending.
A statement issued by the Dubai Department of Finance said the bond would provide the government with the necessary funds amidst the deepening global liquidity crunch.
The bond issue received an immediate response, with the UAE Central Bank subscribing to the first issuance of $10bn worth of the five-year bonds.
In November, Mohamed Alabbar, head of a special committee established to develop strategies to combat the global economic crisis, said the state was carrying debts of $10bn, while government-operated companies had about $70bn of debt burden.
While this is only a fraction of the $350bn that Alabbar said the government and affiliate companies hold in assets, there were concerns that Dubai would have difficulties meeting some of its short-term debt and in being able to inject new funds into the economy. With the launching of the government bonds, some of these concerns have been eased.
To date, there has been little in the way of a bond market in Dubai, mainly due to the state running a substantial budgetary surplus. However, changing circumstances mean bonds could play a greater role in the emirate's capital markets, giving investors yet another option while simultaneously encouraging the development of a private bonds market.
According to Nasser Saidi, chief economist for the DFIC, the new bonds will allow the Central Bank to establish a government bonds and sukuk market, eventually leading to open market operations in terms of the selling and purchase of government bonds.
Moreover, the bonds will allow companies to price bonds and sukuk, which they will offer through the Dubai government's bonds index, as well as provide the emirate with enough liquidity to complete its construction and infrastructure projects, Saidi said in an interview with the local media on February 24.
Though Dubai's capital markets may have had a lean year in 2008, the final pieces are being put in place for them to make the most of the economic recovery when it comes.