Despite the fog that has hung over the capital lately, this may prove to have been a good week for transparency in the country. Since the onset of the financial crisis, there has been a widespread "flight to safety". Investors now place a premium not on returns, but on reassurance. They would rather buy US treasuries offering minimal or zero interest rates than, say, shares in Dubai property companies or Abu Dhabi banks. After several months of watching international money flee the country, the Government seems to have realised the need for clearer communications with investors, as well as bringing in measures that should help both allay fears and reveal the extent of potential losses and provisions.
"Increased transparency is needed. Given the increased risk aversion globally now, you assume the worst-case scenario. So if the amount of uncertainty can by reduced, this will be good for the stock prices," said Mahdi Mattar, the chief economist at Shuaa Capital, a Dubai-based investment bank. On Wednesday, the Emirates Securities and Commodities Authority (ESCA) moved to dispel uncertainty over the exposure of local companies to toxic assets. The regulator asked all companies listed on the Dubai Financial Market and the Abu Dhabi Securities Exchange to give "further clarification and details" in their 2008 annual financial statements regarding their investments in securities, property, land, subsidiaries, financial derivatives and structured products. Analysts said the move should help investors assess the vulnerability of companies to the ailing property markets and other potentially risky assets because ESCA will also require companies to describe the geographic distribution and maturity of their investments.
"In the medium and longer term, the likely impact of this enhanced disclosure regime should be more foreign investors deploying capital into the local equity markets," said Eric Milne, the head of banking and finance for the region at Simmons and Simmons in Dubai. "We all know that asset prices have decreased in the region - whether stocks, bonds or real estate - and that most companies have exposure to these in one way or another," said Mr Mattar. "Any increase in transparency, even if it might be hurtful in the short term, will be extremely good in the long term."
The move follows the Central Bank's initiative to urge banks to delay the release of last year's financial results in order to provide a more thorough assessment of their loan and investment books. Analysts said both initiatives should help the country recover from recent losses caused by the global financial crisis. "These are ways in which the central Government through both the Central Bank and the corporate regulator is trying to capture the possible amount of 'toxic assets' that are in the system. It will then help policy makers get an idea of the magnitude of any potential disruptions that may occur to the financial system," said Imran Ahmed, the managing director of asset management at Mashreqbank.
Local stock markets declined by as much as 70 per cent last year, leaving many companies selling at rock-bottom prices. This would normally put the country in a good position for an economic rebound, as foreign investors go bargain-hunting, but there is still a general reluctance to invest in companies without a complete knowledge of what makes them tick. The problem is that although most companies acknowledge the benefit of increasing transparency, some are unwilling to do so at the moment, since it could lead to further short-term losses. If a company has greater exposure to bad assets than investors previously thought, increasing transparency can cause the stock price to dip as investors readjust their expectations. But by forcing all listed companies to open up at the same time, the Government would make the process of increasing transparency less painful, analysts said.
"Some companies might be reluctant because of the short-term repercussions on their stock prices, but this is definitely something good over the long term," Mr Mattar said. "Requiring this level of disclosure at this time may assist companies in drawing a line under some of the value destructions that has taken place over recent months; allowing them to move forward with cleaner balance sheets," said Mr Milne.
However, sceptics say that these calls for further transparency may have the unintended consequence of further blurring the picture. They contrast the Central Bank's call to delay announcing results with the move by Barclays Bank in London to bring forward its annual report in order to reassure investors. Barclays plans to release last year's annual results on Feb 9. It also released an open letter to customers and shareholders, written by Marcus Agius, the chairman, and John Varley, the chief executive, covering some of the concerns.
"These figures demonstrate that although we have been heavily impacted by the credit crunch, our income generation was at a record level in 2008 and has enabled us to withstand this impact and still produce strong profits," they wrote in the letter. Compare this with the statement released by the Abu Dhabi Commercial Bank (ADCB). The day after the Central Bank instructed banks "not to be in a hurry to publish their audited annual accounts or announce any data related to their results through any media", ADCB said it would hold off releasing its fourth-quarter results, due for the following day, until Feb 5. "The board meeting and the results have been postponed to February 5," a spokesman for the bank said, without giving a reason.
Several Gulf Arab banks have reported weaker fourth-quarter profits due to increased provisions for bad loans and write-downs on investment losses. Analysts say the Central Bank is right to want to check all the figures and make sure investors know that there will be no nasty surprises in the future, but it should do its utmost to ensure that this process does not take too long. While few mind waiting until 10am for the fog to clear, no one wants to wait all day.
tpantin@thenational.ae