Government stimulus plan woos back foreign funds

When the global financial tremor jolted key markets and rocked the UAE, foreign investors fled the country with most of their funds. They began to trickle back after the government announced a series of counter-measures and their numbers rose sharply after those measures started to make an impact.

During the peak of capital flight, many analysts blamed the exit of those funds for the collapse of the UAE markets but regulators have dismissed such claims. Some experts again believe the recent surge in local markets have to do with the return of those funds but others see the rise as natural results of growing public confidence in the government's commitment to fiscal stability and its massive overseas financial muscle to carry out this task.

After a steady decline in foreign investment in the UAE bourses in the few months that followed the eruption of the global crisis in mid-September 2008, such funds began to stream back into the country in the second quarter of 2009 and largely gained momentum in the following months.

In September, net foreign purchase of shares in the UAE stood at around Dh1.09 billion but total foreign inflow climbed to its highest level this year of around Dh1.4 billion during that month. Analysts expect the trend to be maintained. "The flow of non-Arab foreign funds in September reached its highest level this year of around Dh1.4bn. I think the flow will remain high in the coming months," said Humam Al Shamma, financial adviser at Abu Dhabi-based Al Fajr Securities, a key UAE stock brokerage and investment company.

"The reason for this surge in the improvement in market prospects is mainly because of the government measures to protect the local financial and economic system. These measures have boosted prospects for market recovery and positively impacted the general sentiment among both local and foreign investors. Another reason is that foreign investors are leaving home countries because of the dim prospects for profits in hedge funds there and the fact that the outlook for economic recovery in emerging economies is stronger."

Shamma said the sharp rise in such funds allied with intensifying government measures to support liquidity and a steady improvement in oil prices to give a strong push to the UAE stock exchanges, with the Dubai bourse surging by around 14 per cent and Abu Dhabi by nearly eight per cent in the third quarter.

He said incoming foreign funds accounted for nearly 6.1 per cent of the total shares traded in Dubai and Abu Dhabi, adding "both markets saw a sharp growth in dealing during September compared to the previous months".

Both bourses recorded one of the largest falls in their history in the aftermath of the global crisis, with the market capitalisation of Abu Dhabi crashing from around $133bn (Dh488bn) at the end of March 2008 to $70bn at the end of March this year. It rebounded to nearly $76bn at the end of June and swelled to about $79bn in mid-September. Dubai's capitalisation plummeted from nearly $137bn to $57bn before edging up to around $61bn at the end of June and around $65bn in mid-September.

"The recent steady recovery in the local markets is partly due to the return of foreign funds. In September, those funds accounted for nearly 6.1 per cent of the total turnover in both bourses," Shamma said.

He said almost all those funds had been pumped into equity investment and ruled out any return of hot money that exited the UAE in late 2008. "These funds have been channelled into stocks," he said. "They are not hot money and I don't think hot money will return to the UAE after it quit the GCC monetary union and made clear there are no plans to revalue the dirham."

Foreign banks withdrew more than Dh44bn in speculative funds from the UAE last year after the country dismissed reports it was about to appreciate the dirham against the US dollar. The withdrawal of such funds pushed the UAE's capital and financial account balance into a massive deficit after recording a large surplus in 2007 despite a sharp rise in the country's oil export earnings in 2008.

From a surplus of around Dh105.4bn in 2007, the UAE's financial and capital account balance suffered from its highest deficit of nearly Dh203.06bn last year to underscore a record deficit in the balance of payments.

"The financial and capital account balance turned negative last year as a result of the exit of speculative money which had entered the UAE in 2007 in anticipation of a revaluation of the dirham against the US dollar," the Central Bank said.

"The outgoing funds included around Dh44.8bn through the banking sector, Dh50.4bn through the non-bank private sector establishments and around Dh108.2bn through public sector institutions."

The Central Bank gave no figures for this year in its 2008 report but its brief monthly baking indicators showed foreign banks repatriated an additional Dh20bn from the UAE in the first quarter of 2009.

In statements last week, the Central Bank governor reiterated that the UAE has no plans to unpeg the dirham from the dollar, describing it as the best currency.

"There are no plans now to change that peg because the dollar is the best global currency and peg option at present. It is a good currency of investment and international trade. No other currency can match the dollar," he said.

In its semi-annual performance report, the Abu Dhabi Securities Exchange (ADX), one of the largest bourses in the Middle East, said there was an increase in foreign dealers, mainly institutional investors.

According to ADX Chief Executive Tom Healy, the number of institutional investors increased by around seven per cent at the end of June this year in line with what he called a strategy to attract such market players.

"These investors actively contribute to better transparency and trading stability. Many institutional investors tend to be from outside the UAE, and increasing their number is an important objective for us in encouraging a diversity of shareholder types in ADX," Healy said.

In other remarks, Healy urged companies listed on the UAE markets to devise plans to further encourage foreign investment and dismissed claims by analysts that the withdrawal of foreign funds is to blame for the market collapse.

"The problem here is that our companies do not have any plans to encourage foreign investors. We have not seen any real plan to keep the foreign investors, and encourage them to stay so they will become long-term investors instead of short-term speculators and opportunist investors," Healy said.

"In Europe and other developed markets, companies always seek to attract foreign investors. They prepare plans and programmes to encourage capital inflow and benefit from it. Here, we have not seen such actions. I think our companies need to draw up plans to encourage foreign investors to stay as long-term investors not just speculators… our companies can benefit from this."

Healy said foreigners should not be blamed for the sharp decline in the bourses of the UAE and other Gulf oil producers over the past year, adding that there are several other factors, including the global financial crisis.

"To blame the foreign investor for what has happened over the last year is naive… they are not the only one who caused drastic decline in the markets. Take a look at the Saudi bourse. It does not have significant foreign shareholding but it has suffered as was the case in other Gulf bourses," he said.

"There are several factors that have pushed down these markets over the past period. We should not hold foreign investors responsible for this. It is simply naïve to say foreign investors have pulled the markets here down."

In a statement in April, the Securities and Commodities Authority, the UAE bourses regulator, said local exchanges had reached their bottom and are pulling out gradually. It said they have started to show signs of gradually recovery.

Dealers supported such a view on the grounds there is an improvement in liquidity and the government appears serious in its rescue plans.

"There has been a marked improvement in the local and some foreign markets because of stimulus plans and quantitative easing by many governments, including printing a large quantity of notes to tackle the serious shortage in liquidity," said Fadi Kiswani, an analyst at Al Sharhan Securities.

"Here in the UAE, I think the recovery in the local markets is a result of the return of foreign funds, high public spending, and the government counter-crisis measures as part of an overall stimulus plan. I don't think the recovery has to do with any improvement in profitability of listed companies. Many of them have not performed well in the past months and I don't see a turnaround in their profitability overnight. The boom era is over and any improvement in the performance of listed companies will take time."

Kiswani said he expected the local market to keep recovering slightly in the next few months but ruled out any major improvement. "I think 2009 will not be as bad as had been expected, thanks to government measures to mitigate the impact of the crisis. I can see slow recovery in the coming months but it's better to describe it as stability. In normal conditions, such measures could give a big push to markets but in the present situation, the government action only prevented a real problem."

According to experts, the government rescue measures have also prevented a sharp contraction in the economy this year and boosted prospects for a strong recovery in 2010. Forecasts by the International Monetary Fund showed the UAE's real GDP would slip by just 0.2 per cent this year, one of the lowest decline rates in the Gulf.

The IMF also projected a 2.4 per cent growth in the country's GDP in 2010 while inflation could dive from a record 12.3 per cent in 2008 to only 2.5 per cent this year and 3.3 per cent in 2010.

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