Pessimism in UAE markets requires drastic action now

The crisis in UAE markets needs urgent attention, even including a temporary suspension of trading.

Does the continuing fall of the UAE markets call for a suspension of trade until further notice?

Having been involved in the regulation of the financial markets in the UAE in their early stages, in 2006 on the corporate governance side at least, I cannot ignore the alarming messages in the local media over the last two months, calling on regulators to give markets an open leave of absence until a rescue plan is put in place.

Some have described the markets as if they were in a free fall despite the slight recovery two weeks ago. Many experts believe that more regulation is necessary and blame the regulator, the Emirates Security and Commodities Authority (ESCA), for a slow and relatively minimal intervention. The line of thought is that the UAE economy, like the world economy, is improving one day and deteriorating the next, creating uncertainty with a host of new challenges, and an active crisis-containment policy is urgently required

The UAE has shown strong signs of recovery since the global financial crisis in 2009 and the overall prospects are expected to improve going forward. But UAE financiers and politicians who still boast of the country as a financial safe haven, apparently immune from the global credit crunch and the Arab Spring, are weary of the unease in the stock markets that has spread from foreigners to Emiratis over the last two years.

The continued panic trading is a serious threat because it is self-reinforcing. A particularly vulnerable group includes those who took out loans to buy stocks, then found themselves forced to put up extra collateral as stock prices fell, so the only way for them to raise cash was to sell more stocks, creating a vicious circle.

The mounting losses have spurred debate within the country's political and business elite, as seen in the media, as to what kind of government intervention is required to halt the panic sell-offs and stop the bleeding.

Would a move by ESCA to suspend stock trading be prudent? And what effect would it have? Suspending trading for, say, a few months, until the government found the time to implement a rescue plan would be a drastic measure, but it might give the plan time to work and assuage the cycle of panic.

Normal financial transactions like lending and banking would be unaffected, but no stock trading would be allowed. The economy is not reliant on the stock market to function, at least in the short term. Stocks generally raise capital for a company only once, after which the bulk of trading has little to no effect on the day-to-day activities of the company. If trading were halted for a few weeks or months, nothing much should change (except for the speculators).

According to senior financial analysts, the markets crisis in the UAE is so severe that many brokerage companies are suspending operations because they cannot afford renting offices and paying employees. The few investors who are still around wake up every day eager to hear of a new deal that might solve the crisis, but hopes and markets always sink again.

Despite the fundamental assumption of rationality, markets in recent months have been acting on sentiment and, to an extent, panic. The proposed suspension would give time for authorities to address liquidity concerns.

The suspension of the market would protect listed companies from significant losses in value. If the current trend is allowed to continue, good companies with genuine economic value might loose out. That would deter other companies, including family-owned enterprises, from listing.

A suspension of market trading might trigger all kinds of reactions from relevant parties. In the long run, however, a suspension might save the exchanges until a financial rescue plan is reached. When people recognised that companies were still making money, there would be a massive uptake as people started buying again.

More regulation is not what is required now. The ESCA has been neither vigilant nor proactive in fine-tuning regulations to bring it to date with the best practices of international financial markets. Regulators should have cancelled brokerage companies' licences, and reviewed complaints by investors and companies, but no real measures were in place to help investors or protect them from the poor practices of some brokerage companies. The inability of market regulators to enforce existing rules and regulations has hindered the healthy development of the market.

The ESCA has relinquished its authority as an adjudicator of disputes to the local courts, which unfortunately lack the knowledge and expertise, leaving many aggrieved investors at the mercy of brokerage companies. Nobody can say for sure how this legal vacuum, lack of resources and absence of political will have undermined the capacity of regulators.

The hope for the markets lies in local investors and national business groups. In order to move forward, economic and legislative initiatives and a political will are required for a rescue plan to save the markets, which play a critical role in economic growth and financial stability.

Diana Hamade is an Emirati lawyer and legal consultant. She is the founder of International Advocate Legal Services in Dubai