Brokerage firms under threat as lack of liquidity hits Arab stock markets

A trader at the Saudi bourse. Tadawul's turnover plummeted by $161bn last year. (AFP)

Zuhair Kiswani, Manager of Al Sharhan Securities, used to spend most of the year at his office in Sharjah to cope with a business upsurge in the stock markets of the UAE and neighbouring Gulf countries. Now he spends most of the time in his home country, Jordan, because of a sharp downturn in activity.

"Business has sharply gone down and there is not much work any more… That is why my father is away most of the time," said Kiswani's son Fadi. "Those who say the crisis is over are wrong… We are still amid a crisis and no one knows what the future hides for the markets and the brokerage companies here and elsewhere in the region.

"Turnover in the UAE has sharply gone down because of lack of liquidity and that is the case with other Arab bourses," he said.

Jamal Ajjaj, another broker at Al Sharhan, agreed that business had largely stagnated and blamed liquidity shortages and investors' fears. Another financial analyst based in Abu Dhabi said liquidity shortages are the main reason for the low turnover in the region and warned that many stockbrokerage firms in the UAE could collapse.

"The UAE has the largest number of stock brokerage companies in the region. We have nearly 100 such companies but share dealing is concentrated in the hands of a few firms," said Ziad Dabbas, share dealing and financial advisor at the government-controlled National Bank of Abu Dhabi.

"Amid such a sharp decline in business, how can all those companies continue, taking into account their high expenses? The markets in the region are suffering from stagnation and here in the UAE, turnover plunged by around 88 per cent in the first two months of this year compared with the same period of last year. In such a situation, we expect that many stockbrokerage companies to merge and others to shut and withdraw from the market soon," he said.

Official figures showed that in 2009, bank credit tightness along with post-crisis investor concerns and other factors depressed the combined value of share traded in the Arab stock markets by more than $324 billion (Dh1.19 trillion).

Official data showed the collective turnover of the 13 main official Arab stock exchanges plunged to a five-year low of around $567.8bn during 2009 from nearly $891.9bn during 2008.

The 2009 turnover was nearly half the value in 2007 and just over a third of the peak value of $1.59trn recorded in 2006, according to the joint Arab stock data base at the Abu Dhabi-based Arab Monetary Fund (AMF).

All 13 exchanges recorded a large fall in turnover last year but the bulk of the decline was in the bourses of the GCC given their relatively high capitalisation and value of traded shares.

"The main reason for the decline in turnover in 2009 and this year is the shortage in liquidity as banks are still reluctant to lend or guarantee shares for investors. Another factor is that many investors who had bought shares when their prices were high do not want to sell for low price now," Ajjaj said.

"Potential buyers are also hesitant to buy because they think that prices will go further in the future. We are still in the heart of the crisis despite a slight increase in the capitalisation of some markets. There is a psychological fear among investors and all these factors will affect the business of stock brokerage firms. Many of them can no longer meet expenses, growing salaries for staff, and the expanding requirements by the authorities.

"I think a lot of these companies will eventually be forced out of the market or mergem," Ajjaj added.

A breakdown by the AMF showed Abu Dhabi Securities Exchange (ADX) recorded the largest drop in turnover, which tumbled below a third last year.

In absolute value, Saudi Arabia was the biggest loser, with turnover at its Tadawul exchange plummeting by around $161bn, nearly half the total decline in the turnover of Arab markets, the figures showed.

Other key victims were the markets of Dubai, Kuwait, Qatar, Jordan, Egypt and Morocco while the remaining bourses were also losers albeit to a lesser extent.

The report showed Saudi Arabia by far remained the busiest market in the Middle East in terms of turnover, which stood at $322.4bn during 2009, more than half the total value of shares traded in the Arab region.

Kuwait came second, followed by Egypt, Dubai, Qatar, Abu Dhabi and Morocco. Despite the plunge in turnover, the combined Arab market capitalisation gained nearly $85bn at the end of 2009 compared with a year earlier. From around $805.5bn at the end of 2008, their capitalisation swelled to nearly $890bn towards the end of 2009. By March 3, its swelled to $926bn.

The increase followed a staggering decline of around $525bn in 2008 and a surge by nearly $458bn in 2007.

"There has been a change in the general business situation in the Arab stock markets since the beginning of this year," said Ahmed Al Samirai, Chairman of the Sahara Group, another key UAE stocks firm.

"There has been a decline in the value of shares traded in the region mainly because of a lack of sufficient liquidity and the inability of most regional markets to attract a bigger number of foreign investors. Liquidity is now concentrated in a handful of sectors, mainly real estate and banking in the UAE and Qatar and industry and insurance in Saudi Arabia. In general, there is a liquidity shortage," he said.

The AMF figures showed turnover, the total value of traded shares, has steadily declined in most Arab markets over the past few months despite massive fiscal stimulus measures.

After plunging to around $145bn in the first quarter of 2009, turnover jumped to nearly $225bn in the second quarter. But it remained far below the turnover of $307bn in the second quarter of 2008. In the third and fourth quarters of 2009, the value of traded shares averaged only around $120bn in each quarter.

Turnover tumbled to only around $65bn during the period between the start of 2010 and March 3 compared with as high as $180bn in the same period of 2009, according to the AMF.

On a monthly basis, turnover edged up from around $30.4bn in December 2009 to $33.1bn in January 2010 before falling back to about $28.4bn in February. In the first three days of March, it stood at $3.8bn.

A breakdown showed turnover in Abu Dhabi dropped to around $696m in February from $835m in January, a decline of about 16.5 per cent. Dubai tumbled to $1.2bn from $2.6bn while Saudi Arabia's Tadawul plunged by around 17.7 per cent to $14.4bn from $17.5bn.

Kuwait rebounded to $5.7bn from $4.1bn while dealing in Oman's bourse dived to around $311m from about $369m. Turnover in Bahrain grew to around $33m from nearly $24m in the same period. Dealing in Qatar declined to around $1.25bn from $1.27bn.

Outside the Gulf, turnover in Egypt slumped to around $3.1bn from $4.04bn while in Morocco it rose to $553m from $365m. Amman's bourse fell to around $696m from nearly $835m.

Ironically, the Palestine bourse which is supposed to suffer most from lack of investor's confidence because of tension with the Israelis, was the star performer in terms of turnover, which more than tripped to $99m from $26m.

"I think the markets in the region are suffering from a liquidity shortages," Dabbas said, adding: "As for this year, I don't think there will be an upsurge… I can see a relative stability. All this depends on better economic conditions, a return of investors' confidence, and resumption of lending by banks."

Analysts believe GCC banks, which had lavished funds at the height of the oil boom in 2007 and the first half of 2008, could gradually ease their credit squeeze this year but they rule out a return to the pre-crisis levels.

In the UAE, which has the largest banking sector in the Arab world, resident credits by its 24 national banks and 28 foreign units jumped by around 48 per cent from Dh626.6bn at the end of 2007 to nearly Dh924.3bn at the end of 2008. Although loans picked up in the second half of 2009, they were sharply slower this year than in 2008, growing by around 11 per cent in the first 11 months, according to the Central Bank, which put total credits at Dh1,027bn at the end of November.

"Recent events are likely to weigh on the UAE banking sector where lending activity is already weak. Recent data suggest annual loan growth will be about five per cent this year, down from more than 38 per cent in 2008," the Saudi American Bank Group (Samba) said in a recent study.

"By the second half of this year, we should see a revival as the impact of higher public spending and improving global economic conditions feed through."

In Saudi Arabia, central bank Sama's figures, showed the combined credits provided by the kingdom's 12 commercial banks grew by only 0.9 per cent in the first 10 months of 2009.

 

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