UAE regulators temper irrational upturns

The elevation of the UAE’s stock market from MSCI Frontier Market to Emerging Market category has come as an icing on the cake, but it is reassuring that the celebrations have been tempered by a sense of caution. The markets acknowledged the development by registering some gains immediately after the announcement, but soon followed it by a realistic correction.

Dubai and Abu Dhabi stock markets have already been responsible for two of the world’s top five equity rallies this year.

Nobody expects the market to ride the wave of a bigger boom in the wake of the upgrade, although it does mark a milestone in the development of the country’s financial sector, particularly since the UAE had failed to make the grade last year due to some gaps in the structure. The inclusion is important as it recognises a certain level of maturity in the financial sector, which fulfils a necessary condition for future development.

It also opens the prospects of more focused attention by foreign institutional investors on the UAE financial sector.

Still, it is an icing on the cake because the economy has shown clear signs of an upswing. A broadening recovery in the economy has been visible in Abu Dhabi and Dubai. In fact, Dubai has had the largest economic expansion in the last five years.

Property recovery

The Dubai real estate sector has regained some momentum, marked by the launch of a number of mega projects, some of them at the higher end of pomp and luxury, bringing back the inspirational side of the market. According to compilations, in the past six months alone, Dubai has announced projects worth over $40 billion (Dh146.9 billion), which talks of renewed confidence in the sector, although it is a far cry from what it used to be during the heydays of the boom.

Prices have been going up steadily and once again, there are takers for off-plan offerings, but restricted to the more established players with a proven track record. A successful World Expo 2020 is expected to take the impetus to a new level altogether.

So far so good. But rating agencies and multilateral institutions are already advising caution. The International Monetary Fund (IMF) recently highlighted the need to prevent ‘exuberant risk taking’ and advocated measured execution of projects in Dubai to avoid the type of legacy issues that underpinned the 2009 crisis. While the IMF welcomed the efforts to further develop the economy, it has called for the gradual and flexible implementation of the mega-projects depending on demand. Management of these risks demands prioritising and sequencing of the major projects, assessing the quality of planned spending and improving the framework to handle scrutiny, selection, delivery and funding of these projects.

Similar sentiments had been expressed during the run-up to the 2009 crisis, but the situation then was such that whistle-blowers had no place in the scheme of things. When everything was moving in stratosphere, noises on the ground could hardly reach anywhere.

The situation was simply unprecedented that nobody had a clue to what was really happening. Unfortunately, it turned out to be too good to be true.

Better grip

This time around, however, the situation may be different as everyone has learnt a lesson or two. Regulators are much more equipped to deal with the issues as they have honed their skills somewhat and have greater grip on the tasks.

The central bank is also much more proactive and has benefited from new policy frameworks that evolved with the problems. Central bankers now have the wherewithal to conduct stress tests and come up with timely solutions.

More stringent regulations related to mortgage lending, including caps on loan-to-value and debt-service-to-income ratios, are expected to help mitigate some of the risks, though the imminent effect on the residential real estate market, currently largely a cash market, will admittedly be limited.

Perhaps, the most important of all is the fact that a large number of players are those who had their fingers burnt in the first round; so, they know what it takes to be more cautious.

— The writer is a UAE-based journalist.