Abu Dhabi Stock Market

¶ … Abu Dhabi stock market: Efficiency and transmission mechanisms

Like many of its neighboring countries, the United Arab Emirates has made enormous efforts in recent years in an attempt to reduce dependence on the dominant public sector and to provide private investors a bigger role in the economy. The purpose of this study was to determine whether the Abu Dhabi stock market is efficient, what type of analysis mechanism is best suited for identifying investment opportunities, and its implications for investors and the state. For example, the weak form of the efficient markets hypothesis suggests that it is impossible to earn superior risk-adjusted profits based on the knowledge of past prices and returns. To this end, this study examines the United Arab Emirates in general and the Abu Dhabi securities exchange in particular to determine whether these assumptions are accurate, and how they play out in real world settings. A critical review of the relevant, peer-reviewed, scholarly and organizational literature is followed by an analysis of stock market performance in the region and what these findings suggest for the future. A summary of the research and salient findings are presented in the concluding chapter.

Chapter One: Introduction

Statement of the Problem

Purpose of Study

Overview of Study

Chapter Two: Review and Analysis

Background and Overview

Stock Market and Economic Growth

Economic Performance in United Arab Emirates in General and Abu

Dhabi in Particular

Introduction to Abu Dhabi Stock Market

Abu Dhabi Stock Market Index and the Price of Oil

Chapter Three: Methodology

Chapter Four: Data Analysis

Determination of Efficiency of Abu Dhabi Stock Market

Chapter Five: Results and Findings

Chapter Six: Conclusion

Case Study of Abu Dhabi Stock Market: Efficiency and Transmission Mechanisms

Chapter One: Introduction

In the 19th century, the Trucial States of the Persian Gulf coast granted the UK control of their defense and foreign affairs; in 1971, six of these states, Abu Zaby, 'Ajman, Al Fujayrah, Ash Shariqah, Dubayy, and Umm al Qaywayn, merged to form the United Arab Emirates (UAE) and these states were joined a year later by Ra's al Khaymah (United Arab Emirates, 2007). Today, the UAE enjoys a per capita GDP that is on par with those of leading West European nations and the state's generosity with oil revenues and its moderate foreign policy stance have allowed the UAE to play an increasingly vital role in the affairs of the region (United Arab Emirates, 2007). This point is made by Al-Alkim, Al-Sayegh, Al-Shamsi and their colleagues (1999), as well, who report that, "By investing and reinvesting the nation's wealth in productive enterprises, the UAE has been transformed into a nation with one of the highest per capita incomes in the world and, arguably, the best quality of life in the Middle East. The gross domestic product is now $50 billion" (p. 2). Throughout the UAE, health care is free of charge, and the infant mortality rate is among the lowest in the world; likewise, education is also free and the UAE has one of the highest literacy rates in the developing world (Al-Alkim et al., 1999). In addition, during the period 1971 and the late 1990s, the UAE's population increased more than 15-fold and life expectancy increased from 60 years to 75 years (Al-Alkim et al., 1999). Given this environment, understanding how the Abu Dhabi securities exchange contributes to the nation's economic development has assumed new importance and relevance, and these issues are discussed at length further below.

Statement of the Problem

Like other Gulf Arab states, the United Arab Emirates has made enormous efforts in recent years in an attempt to reduce reliance on the dominant public sector and to provide private investors a bigger role in the economy (Abdou, Al Zarooni & Lewis, 2006). To this end, in recent years, the government of Abu Dhabi has implemented a number of initiatives designed to make privatisation part of this policy. Privatisation of public service entities has proven to be a successful experience in Abu Dhabi following the privatisation of the power and electricity sectors (Abdou et al., 2006). According to Eugene Fama's (1970) seminal study of market efficiency, the primary hypothesis following from quick and accurate reaction of stock market prices to new information is that stale information is of no value whatsoever in actually making money; therefore, in order to evaluate this hypothesis empirically, researchers need to define "stale information" and "making money." The first definition can be defined in a relatively straightforward fashion; however, defining "making money" remains a highly controversial issue (Schleifer, 2000).

In this regard, Schleifer (2000) emphasizes that, "The reason is that 'making money' in finance means making a superior return after an adjustment for risk. Showing that a particular strategy based on exploiting stale information on average earns a positive cash flow over some period of time is not, therefore, by itself evidence of market inefficiency" (p. 6). In order to earn this profit, an investor may have to bear risk and his profit may just be a fair market compensation for risk-bearing; however, there is a problem in measuring the risk of a particular investment strategy and demands a model of the fair relationship between risk and return. For this purpose, one widely accepted model is the Capital Asset Pricing Model; however, this is not the only available alternative. According to this author, "The dependence of most tests of market efficiency on a model of risk and expected return is Fama's (1970) deepest insight, which has pervaded the debates in empirical finance ever since. Whenever researchers have found a money-making opportunity resulting from trading on stale information, critics have been quick to suggest a model of risk -- convincing or otherwise -- that would reduce these profits to a fair compensation for risk-taking" (Shleifer, 2000, p. 6).

By contrast, the definition of stale information is much less controversial, and Fama differentiates between three types of stale information that provide the basis for three forms of the efficient markets hypothesis, the so-called weak form efficiency, wherein the relevant stale information is represented by past prices and returns (Shleifer, 2000). The weak form of the efficient markets hypothesis maintains that it is impossible to earn superior risk-adjusted profits based on the knowledge of past prices and returns. For instance, Shleifer reports that, "Under the assumption of risk neutrality, this version of the EMH reduces to the random walk hypothesis, the statement that stock returns are entirely unpredictable based on past returns. Past returns are not the only stale information that investors have. The semi-strong form of the EMH states that investors cannot earn superior risk-adjusted returns using any publicly available information" (2000, p. 6). In other words, as soon as information becomes public, it is immediately incorporated into prices, and an investor therefore is unable to gain by using this information to predict returns; as a result, a semi-strong form efficient market is obviously weak form efficient as well, since past prices and returns are a proper subset of the publicly available information about a security (Shleifer, 2000).

Purpose of Study

The purpose of this study was to determine whether the Abu Dhabi stock market is efficient, what type of analysis mechanism is best suited for identifying investment opportunities, and its implications for investors and the state.

Overview of Study

This study used a six-chapter format to address the research purpose identified above. The first chapter introduced the topic under consideration, provided a statement of the problem under investigation, as well as the purpose and this overview of the study. Chapter two provides the background and an overview, a discussion of stock market performance and economic growth, as well as an analysis of economic performance in the UAE in general and Abu Dhabi in particular. In introduction to the Abu Dhabi stock market is followed by an analysis of the Abu Dhabi stock market index and the price of oil. Chapter three describes more fully the research methodology used in the study, and chapter four provides an analysis of the data to determine the historic efficiency of the Abu Dhabi stock market. Chapter five presents the study's results and findings, and salient conclusions are provided in chapter six.

Chapter Two: Review and Analysis

Stock Markets and Economic Growth.

From a pragmatic perspective, efficient markets appear to help stimulate economic growth, but there are a number of assumptions involved. In the case of stock exchanges, for example, common stocks are traded on well-organized exchanges like the New York Stock Exchange or in dealer markets called over-the-counter markets in a process that facilitates the rapid execution of buy and sell orders (Batten, 2000). According to this author, "The price response to any change in demand caused by new information can be almost instantaneous. Such stock markets are also competitive due to the large number of participating individuals, institutions, corporations, and others. Competitive forces also tend to cause prices to reflect available information quickly" (Batten, 2000, p. 210). Markets that are capable of quickly and accurately reflecting available information are considered efficient markets; those markets that are able to adjust more rapidly and accurately are considered to be even more efficient (Batten, 2000). A number of economists suggest that markets are efficient, but this efficiency is merely assumed. In this regard, Batten points out that, "There is no actual proof. It is virtually impossible to test for market efficiency since the 'correct' prices cannot be observed. To get over this hurdle, most tests examine the ability of information-based trading strategies to make above-normal returns. But the results of such tests do not really prove whether markets are efficient. Therein lies the basic dilemma" (p. 210).

In his book, Stock Market Cycles: A Practical Explanation, Bolten (2000) reports that assuming that an economy begins in a trough (a period this author refers to a the first stage of the economic cycle), expectations are for positive economic growth and higher future earnings, which has a positive impact on stock prices. In this regard, Bolten points out that, "Interest rates are typically low at this period in the business cycle, which will positively affect stock prices due to a decrease in firms' cost of capital. Low interest rates also induce investors to transfer wealth from low-yielding bonds into stocks, which pushes up stock prices. The combined effect of these factors causes stock prices to rise relatively quickly at this stage, even though the economy may show only marginal signs of improvement" (p. 121).

During the second phase of the economic cycle, the nation's economy continues to grow and the demand for capital increases, a process that leads to inflationary pressure and interest rates begin to rise gradually (Bolten, 2000). The author adds that, "Expectations of future earnings increase due to the strengthening economy, however. At this stage of the cycle the positive impact of higher earnings expectations dominates the negative impact of higher interest rates. The overall effect on the stock market is positive and prices rise, although not as fast as in the first stage of the economic recovery" (Bolten, 2000, p. 121). The third economic cycle stage is characterized by continued economic expansion: "The supply of loanable funds cannot keep pace with the increased demand for capital, which causes the rise in interest rates to accelerate. As inflationary concerns worsen the Federal Reserve is likely to tighten monetary policy, which puts more upward pressure on interest rates. Furthermore, the rate of earnings growth begins to slow down due to diminishing marginal productivity" (Bolten, 2000, p. 121). These factors result in a decrease in the rate of economic expansion; stock prices increase slowly and eventually peak, even though the economy has not yet reached its peak (Bolten, 2000).

While the economy slows, interest rates may not immediately decrease. Inflationary pressures and the increased costs of financing unanticipated inventory accumulations and lagged accounts receivable collection will cause interest rates to continue rising. The combined effect of investors transferring wealth from stocks to bonds and the slow growth in corporate earnings has a negative effect on stock prices (Bolten, 2000).

During the fourth stage of the economic cycle, worsening economic expectations dim future earnings prospects, which has a negative effect on stock prices. The decreased demand for credit causes interest rates to begin falling. Stock prices will continue to decline until interest rates fall substantially, however. The downtrend in interest rates and improvement in earnings expectations eventually cause a rebound in stock prices (Bolten, 2000). These processes are illustrated in Figure ____ below.

Figure ____. Economic Factors and the Stock Market Cycle.

Source: Bolten, 2000, p. 122.

As noted above, Fama (1970) coined the term "weak-form market efficiency" and suggested three levels of efficiency; the semistrong form of market efficiency implies that markets adjust rapidly and in an unbiased manner to public information. Under the strong form of market efficiency, both public and private information are quickly impounded in the security price. Strong-form market efficiency implies semistrong-form market efficiency, and semistrong-form market efficiency in turn implies weak-form market efficiency (Batten, 2000, p. 282). The growing body of research into weak-form market efficiency that began with Bachelier concluded that stock prices follow a random walk. The random walk hypothesis means that at a given point in time, the size and direction of the next price change is random with respect to the knowledge available at that point in time. This implies that charting and all other forms of technical analysis practiced by various investors, amateur and professional alike, are doomed to fail. Market efficiency can also take a semistrong form or a strong form (Batten, 2000).

Market efficiency also seems to have its roots in the idea of intrinsic value. Although the value of most goods is acknowledged to be a function of consumer beliefs, preferences, and endowments, securities have often been treated as having a value independent of these consumer characteristics. Their value is based on the characteristics of the firm behind the security. This is a supply-side approach. The price of any security, however, depends not only on the characteristics of the firm or commodity involved but also on the demand for the security. In other words, it depends on the characteristics of the investor. To date, the most commonly used model to relate investors' current price expectations with future price distributions is the rational expectations equilibrium model (Batten, 2000). A fully revealing, rational expectations equilibrium occurs when prices reveal all the information held by individual investors (i.e., when price expectations are realized in a future period). "But whose expectations? If investors possess homogeneous beliefs, the choice of whose expectations to use is greatly simplified. In a perfect and competitive economy composed of rational individuals with homogeneous beliefs about future prices, by any meaningful definition present security prices must fully reflect all available information about future prices" (Batten, 2000, p. 211).

Economic Performance in United Arab Emirates in General and Abu Dhabi in Particular.

According to U.S. government analysts, the UAE has an open economy with a high per capita income and a sizable annual trade surplus. In spite of largely successful efforts at economic diversification, about 30% of the UAE's GDP remains directly based on oil and gas output, and the economic performance of the state is inextricably linked to the prices of those commodities. Since the discovery of oil in the UAE more than 30 years ago, the UAE has undergone a profound transformation from an impoverished region of small desert principalities to a modern state with a high standard of living; furthermore, the UAE government has increased spending on job creation and infrastructure expansion and is opening up its utilities to greater private sector involvement (UAE, 2007). In April 2004, the UAE signed a Trade and Investment Framework Agreement (TIFA) with Washington and in November 2004 agreed to undertake negotiations toward a Free Trade Agreement (FTA) with the U.S. Higher oil revenue, strong liquidity, and cheap credit in 2005-06 led to a surge in asset prices (shares and real estate) and consumer inflation. Rising prices are increasing the operating costs for businesses in the UAE and degrading the UAE's allure to foreign investors. Dependence on a large expatriate workforce and oil are significant long-term challenges to the UAE's economy (UAE, 2007).

The UAE enjoys the distinction of being the most stable country in the Middle East from both the perspective of internal security and politics, while the macroeconomic base of the federation is firmly based on the state's enormous hydrocarbon wealth; however, more than 90% of these resources are located in the emirate of Abu Dhabi (Strong fundamentals support Abu Dhabi property, 2006). Indeed, the capital city of the UAE is widely regarded as a geological marvel, and sits on some 10 per cent of the world's oil reserves and a considerable quantity of gas (Strong fundamentals support Abu Dhabi property, 2006). Moreover, extraction costs for the valuable resources remain among the lowest in the world. In addition, the UAE has not suffered from the instability of many of its neighbors and has quietly gone about developing its natural resources without violent lurches in policy and in partnership, rather than conflict with the major international oil companies (Strong fundamentals support Abu Dhabi property, 2006). Some key economic metrics for UAE are shown in Table ____ below.

Table ____.

Key Economic Metrics for UAE.

Category

Current Est.

Global Rank

Economic freedom

25th of 156]

GDP > Nominal

51st of 184]

GDP > Nominal (per capita)

27,686.31 per capita

21st of 184]

Gross National Income

44th of 172]

Gross National Income (per capita)

19,198.30 per person

22nd of 172]

Human Development Index

41st of 178]

Income category

High income: nonOECD

Tourist arrivals

43rd of 152]

Trade with U.S. > U.S. exports of textile, sewing machines

24th of 183]

Source: United Arab Emirates, NationMaster, 2007.

Notwithstanding the above, the political system in the UAE remains plagued by some actual and potential problems, including the following:

The economy is extraordinarily dependent on foreigners, who make up at least 80% of the resident population, the highest percentage of any country in the world;

The foreign population is highly heterogeneous;

The political system is traditional and authoritarian, governed by an oligarchy of the seven ruling tribal sheikhs;

Natural resources are unevenly distributed among its seven constituent emirates;

Between the two wealthiest emirates, Abu Dhabi and Dubai, there are significant differences in life-style and in attitudes toward economic and social issues;

The government has engaged in a public and vitriolic dispute with Iran, a vastly larger and much more powerful neighbor sitting just fifty miles away across the Persian Gulf (Rugh, 1997).

This author emphasizes, though, "The UAE political system is however not as fragile as it might appear. Despite the factors cited above, it has, in fact, sources of strength and resilience which will probably protect it in the short run and can be mobilized by its UAE leadership to maintain the essentials of the current system even in the longer term" (Rugh, 1997, p. 15). Two critical aspects of the UAE political and economic system are:

The country produces more than two million barrels of petroleum per day, generating sufficient revenue to sustain a population of two million people at a high standard of living; and,

It has nearly 100 billion barrels of recoverable reserves (more than four times that of the United States), enough to allow current production to continue for over 100 years. This good fortune has permitted the UAE, over the past quarter century, to bring in hundreds of thousands of foreign workers to supplement the national labor force in the petroleum industry, in other industries and in all of the services required for a modern economy (Rugh, 1999).

Furthermore, Abu Dhabi remains one of the few oil producers in the world that has responded to rising global demand for oil and gas by investing in new production capacity which will shortly reach four million barrels per day. There has also been a willingness to embrace downstream innovation with joint venture partnerships like the Borouge petrochemicals project. Further industrial diversification on the back of hydrocarbon development is well in hand for the coming years. And part of the huge oil revenue surpluses of recent years will be wisely invested back into the domestic economy. Future growth of the Abu Dhabi population therefore looks assured by planned economic expansion, particularly related to hydrocarbon reserves. Moreover, Abu Dhabi is a safe and tolerant place for foreigners from the Arab world and externally to live; and the number of such options is shrinking in the region (Strong fundamentals support Abu Dhabi property, 2006).

Introduction to Abu Dhabi Stock Market.

The Abu Dhabi Securities Market (ADSM) was established by Local Law No.3 of year 2000 and was launched on November, 15, 2000; Local Law No. 3 designated the ADSM as a legal entity of autonomous status, authorized independent finance and management, and provided the stock exchange with the requisite supervisory and executive powers to exercise its functions, which are as follows:

Provide opportunities to invest savings and funds in securities in order to benefit national economy.

Ensure the soundness and accuracy of transactions and to ensure the interaction between demand and supply in order to determine prices.

Protect investors through establishing fair and proper dealing principles between various investors.

Impose stringent controls over securities transactions to ensure sound and conduct procedure.

Develop investment awareness by conduction studies and issuing recommendations in order to ensure that savings are invested in productive sectors.

Ensure financial and economic stability and develop trading methods in order to ensure liquidity and stability of prices of Securities listed on the market.

In addition, the ADSM has been authorized to establish trading halls and branches outside the Emirate of Abu Dhabi; thus far, ADSM has established such facilities in Ras Al Khaima, Fujeirah, Sharjah, Zayed City and in Al-Ain City, with a second trading hall being established in the Marina Mall (Market establishment, 2007). The Abu Dhabi Securities Market's board of directors consists of seven members nominated by Amiri Decree and hold office for a term of three years; the first board of directors was constituted by Amiri Decree No. 8 of 2000 (Market establishment, 2007).

The Abu Dhabi stock market's organization chart is illustrated in Figure ____ below.

Figure ____. Organization Chart for Abu Dhabi Stock Market.

Source: High Level Organization Chart, 2007, available at http://portal.adsm.ae/wps/portal/!ut/p/.cmd/cs/.ce/7_0_A/.s/7_0_IE/_s.7_0_A/7_0_IE.

According to the ADSM's investor guidelines, the stock exchange's trading floor is equipped with state of the art technology to provide a maximum liquidity in securities trading through the interaction of supply and demand in order to determine the fair price of securities; moreover, all ADSM registered brokers have offices on the trading floor of the ADSM where they are supplied with trading workstations and various facilities like telephone, fax and e-mail in order to communicate with their clients and execute their orders in an efficient manner (Investor guidelines, 2007). In addition, the ADSM trading floor is open to investors during business hours and provides useful facilities such as large television screens that display real time trading data (Investor guidelines, 2007).

Abu Dhabi Stock Market Index and the Price of Oil.

Today, the United Arab Emirates (UAE) enjoy a relatively unique position among offshore financial centers because they provide important linkages between the Arab world and the international economy. As one authority notes, "They represent an independent federation of seven emirates comprising (broadly from southwest to northeast) Abu Dhabi, Dubai, Sharjah, Ajman, Umm AlQuwain, Rus Al-Khaimah and Fujeirah. They comprise an area of 32,000 square miles in the eastern Arabian peninsula between Saudi Arabia and Oman" (Garner et al., 2000, p. 81). Before the state's independence in 1971, the Emirates were known as the Trucial States and were committed to treaties with the United Kingdom and the nation was far stronger economically and politically than had been anticipated at the time of its independence (Garner et al., 2000).

The UAE entered its third decade with oil and gas revenues of $17 billion, a gross domestic product of $40 billion, and one of the world's highest per capita incomes; moreover, the UAE possesses the world's third largest oil reserves and produces two million barrels per day, making it the seventh biggest producer (Garner et al., 2000). While it is apparent that the UAE enjoys a number of important transportation and communications linkages to support competitive offshore financial services, the Emirates remain committed to achieving broader developmental goals. According to Garner and his colleagues, "In an effort to reduce the petroleum dependency of the oil-producing emirates, both federal and Emirate governments are encouraging investment in fields considered beneficial to the nation" (2000, p. 82). For example, large natural gas reserves have been discovered in Abu Dhabi and are being processed at a $500 million liquefaction plant on Das Island; while an oil refinery has been completed and another is in the planning stage, the nation has diversified from fuels by setting up manufacturing operations that include a steel mill, steel fabrication complex and cable plant (Garner et al., 2000). The ongoing successful expansion of non-petroleum sectors of the economy has been attributed directly to government policy; in this regard, the UAE's industrial sector includes textiles and clothing, footwear, electrical appliances, power station transformers, auto parts and furniture as well as stationery and paper products, air conditioning and refrigeration equipment, plastic containers, surgical gloves and ophthalmic lenses (Garner et al., 2000).

The governments of the various Emirates continue their efforts to attract investments of expertise and capital and they have a viable framework in place to prosecute these goals. For instance, besides a good transportation and communications infrastructure, the UAE enjoys a virtual absence of taxation as well as a well-structured financial sector with no exchange control regulations. Likewise, a number of free-trade zones have been implemented and financial reporting requirements at both federal and local levels are considered minimal (Garner et al., 2000). Other advantages from investing in the UAE include the availability of cheap energy, access to inexpensive regional labor markets, the absence of duties on imported raw materials and the export of finished products as well as closeness to regional markets (Garner et al., 2000). Important sectors of the UAE economy besides its energy components include utilities, communications, construction, banking and financial services, manufacturing projects and tourism; the UAE also provides incentives to foreign investors able to provide needed technical expertise and willing to work in collaboration with citizens (Garner et al., 2000). According to these authors, "The investors are given various concessions beyond which no direct incentives such as capital grants, subsidized loans, preferential contract schemes or import quotas or loans that protect domestic industry are available. All of the Emirates welcome foreign investment for development projects while emphasizing local participation in ventures. As an example, they point to Sharjah as particularly eager to attract manufacturing, warehousing and consumer goods projects" (Garner et al., 2000, p. 83). In an effort to encourage developmental projects, Sharjah has also established industrial zones throughout the city and an export processing free-trade zone near UAE's international airport; incentives are varied but include free consulting services, aid in capitalization, donations of land, low land-leasing rates and reduced rates for power and water (Garner et al., 2000). In addition, the UAE is attempting to become an offshore banking center as well as serving as a company headquarters for the Middle East and Gulf regions (Garner et al., 2000).

The Emirate of Dubai has been a trading center and entrepot within the Middle East for some time (see McKee, Garner and AbuAmara McKee, 1999). The Emirate hosts a free-trade zone, Jabel Ali, 21 miles from Dubai City (Diamond and Diamond, 1998, p. 17). The Jabel Ali zone complex is one of the world's largest man-made ports, providing excellent facilities for trade, manufacturing and services (Ernst & Young, 1990, p. 5). According to Deloitte Touche Tohmatsu International, Dubai hosts 950 international operations (1996). The zone employs some 5,000, most of whom are foreigners (Diamond & Diamond, 1998, p. 17). Furthermore, Diamond and Diamonds note that Dubai enjoys abundant support services, including local labor, health and medical facilities and inexpensive energy, not to mention the inputs of the zone operators to expedite documentation and minimize red tape (1998, p. 17). The harbor comprises sixty-seven berths, more than fifteen kilometers of quay, and a container terminal with the most up-to-date handling equipment that is capable of handling any class of ship (Garner et al., 2000). Other ongoing developmental projects are geared towards the communication industry with its emphasis on Information Technology and the so-called "New" Media; yet another group falls within the domain of traditional mixed-use real estate developments; some projects provide a setting for an emerging financial industry, and of course the ever growing hospitality/leisure industry (Elsheshtawy, 2004). According to this author, "The retail sector, with its accompanying shopping malls is the most visible among this group. Cultural projects such as museums, cultural centres and the like are, interestingly, lacking. Many of these projects are located along a stretch of highway linking Dubai to Abu Dhabi known as Sheikh Zayed Road, a spine which will form the centre of the 'New Dubai'" (Elsheshtawy, 2004, p. 180).

According to Kerpelman, Schvaneveldt, and Schvaneveldt (2005), "Oil was discovered off Abu Dhabi in 1958 and vast reserves have been developed and the UAE has become not only an oil rich nation, but also a highly developed society over the past thirty years. The UAE, comprised of the seven Emirates, has a total land area equal to about 33,000 square miles. Dubai is a large international city with residents from all parts of the world" (p. 77). These authors also note that the UAE.".. is a nation that has come from a desert life of sheep and camels to a highly developed modern nation in only three decades. It has moved from camel caravans to modern freeways and a highly sophisticated infrastructure at a breath-taking pace" (Kerpelman et al., 2005, p. 77).

In his study, "Not Just an Oil Economy," Williams (2006) reports that the Central Bank of the UAE, established in 1980, currently has the responsibilities of issuing the emirates' currency, the UAE dirham (UAD) and maintaining its stability internally and externally as well as ensuring its free convertibility into foreign currencies; in addition, the Central Bank is responsible for directing credit policies to help achieve a balanced growth of the national economy while supervising the banking system. Beyond these weighty responsibilities, the Central Bank is also tasked with the following:

Functioning as the bank of the government within the limits prescribed in the law;

Advising the government on financial and monetary issues;

Maintaining the government's gold reserves and foreign currencies;

Serving as the UAE's financial agent at the International Monetary Fund, the International Bank for Reconstruction and Development (World Bank) and other international and regional financial institutions (Williams, 2006).

The Central Bank had an important role to play in the setting up of local stock markets. The Emirates Securities and Commodities Authority was officially created on 1 February 2000 with the Dubai Financial Market starting operations on 26 March 2000. The Abu Dhabi Stock Market began trading on the 15 November 2000. From a total of 18 listed companies in early 2001, the UAE's financial markets now list a total of 94 companies. Despite a couple of turbulent periods in the middle and late months of last year, markets have regained their stability.

Al Suwaidi insists that this demonstrates both the robust and flexible nature of the UAE economy that has proven itself capable of correcting itself with the minimum of government intervention. The governor also says that the Emirates commercial banking sector remains relatively isolated from stock market corrections as their loan portfolios are strictly limited to 10-11% of their market capitalisation. It was reported by the local press that Al Swaidi had confirmed the UAE was considering diversifying national reserves out of the U.S. dollar by entering the gold market and purchasing Euros. This is presumably because the U.S. Federal Reserve devalue the U.S. currency in order to cope with its twin fiscal deficits.

With the UAE dirham pegged against the U.S. dollar, any dollar devaluation ushered in by Washington would need to be replicated by the UAE Central Bank. Al Suwaidi told reporters that the Central Bank was preparing to convert up to 10% of its estimated $23bn currency reserves into gold, although not immediately. "I do not think it is appropriate to buy gold now -- it is too expensive," the governor told the press while adding that "the appropriate time might come very soon. We are waiting for the market to change... when there is a clear trend of the market going up, you move into it. If it is going down, you wait for the bottom and buy then. There is not a trend at this point." The Central Bank has recently been buying short-term debt instruments in the U.S. In the expectation of a rise in U.S. interest rates.

Sultan Bin Nasser Al Suwaidi has been the governor of the Central Bank of the UAE since 1991. Prior to that appointment, he was managing director and chief executive officer of Abu Dhabi Commercial Bank. He has represented the Abu Dhabi Investment Authority on the executive boards of several banks and financial institutions. CEO Al Suwaidi addressed the Commonwealth Business Council's Global Banking and Finance Forum and provided some timely insights concerning the Abu Dhabi Stock Market Index and the price of oil. For example, in response to a question, "Might I first ask you about the windfall receipts that have arisen with the record high oil prices and your opinion on the best ways of utilising these petro-dollars?," the sultan noted that, "I think we are happy with the present set-up, which has been in place for many years, which is to leave oil revenues with the investment authority and only draw down the amounts needed for the budget. That is what we have been doing. We just exchange with the Central Bank what we need for the federal budget and the local budget. In effect, most petrodollar reserves stay out of the national economy-coming in only if they are required for the national budget and to the extent they are required for the budget. So petrodollars do not really affect the UAE's economic picture in that sense; they do not create a lot of dirhams in the market nor stimulate financial inflation. Nor do we create bottlenecks with the unavailability of foreign currency affecting liquidity. It is a proven system and it has been working for us for many years and we have no problem with it" (quoted in Williams, 2006 at p. 50).

During the interview exchange, the governor was prompted that, based on his previous answer that indicated the UAE did not intervene in the foreign exchange markets, he responded: "No. Why would we do that? We take positions from time to time for investment purposes-moving the eggs around into different baskets shall we say. But that is all. It probably came as something of a surprise to many of the delegates, just how large the UAE's non-oil and gas economic sector is. You talked of the three main planks -- manufacturing, financial services and tourism. Regarding manufacturing, what are the UAE's main products and their major markets, and do you foresee the manufacturing base growing? All the indications, and the efforts being made on the political side, are to grow the manufacturing base still further. You might have heard that Dubai has established an export promotion body which will assist in the creation of more processing and manufacturing plants" (quoted in Williams, 2006 at p. 51).

During this period in the emirates' history, they are producing many things, many industrial products such as building materials and fabricated metals as well as products as diverse as garments and items of household and office furniture -- in fact you name it, we probably produce it. Our major markets are our regional neighbours, but we are seeing strong growth in other markets such as Canada and Australia. There has been a lot of comment recently on the current property market boom in Dubai and, perhaps to a lesser extent, in Abu Dhabi. Do you have any concerns regarding this boom? Do you think it is sustainable? Is the property market overheating, heading for a crash, or can a 'soft-landing' be engineered? The Central Bank does not really play any administrative role in the property market. The Bank does play a role in administering credit extension. In other words, the Bank does not decide who or what should be built; however, the governor emphasized that the Bank does control the lending ratios it sets for commercial banks and financial institutions and determines the base interest rate that, in turn, informs commercial lending rates. The property market has expanded to a certain extent, but the commercial banks are well cushioned and are now taking more security than in the past and they themselves are not involved in certain types of real estate. We have seen property prices shoot-up because of the lack of housing units and there has been tremendous demand because the UAE has become such a strong regional centre with many companies want to locate their businesses in the UAE and relocate their people there.

The UAE is a free market and investors have moved a lot of money into real estate projects. These real estate projects will be completed by the end of this year and we expect a lot of housing to come onto the market. When they do, that will serve to reduce prices and regularise inflation that has risen recently due to the housing prices. We measure overall economic inflation with a basket of prices, 35% of which is the price of housing rents. We anticipate the fall in housing rents will bring the market back into equilibrium, and we are happy about this because it is beneficial to the macroeconomic picture. It will do miracles to improve our inflation rate.

The UAE is, as you say, a free market; but would it be fair comment to say that-certainly compared to the pre 9/11 era, and perhaps at the behest of western governments -- the country has imposed much tougher regulatory and compliance criteria on inward investments? NAS: Yes, that is fair comment. We have an extensive range of criteria that investors must now meet before we allow inward investment-perhaps most importantly regarding the beneficial ownership of funds. In the past it was possible to establish a business in the UAE and have a company whose owners were not known, but now we require that every company that operates in our country must be absolutely transparent regarding its ownership.

TME: Does the Central Bank take responsibility for this oversight? NAS: The National Anti-Money Laundering Committee, that has representation from the Central Bank, the Ministries of Interior, of Justice-in fact all major government ministries and regulators, implements this oversight. The free-trade zones are also required to implement these investment criteria and conduct due diligence exercises on every company that wants to set up in business, and their regulators also sit on the committee (Williams, 2007).

In the recent report, "Abu Dhabi Securities Market," (2007), it was announced that the Abu Dhabi Securities Market (ADSM) organized over the past two days, the first presentation to investors in a series of road shows that highlight investment opportunities for international institutions in ADSM in particular and Abu Dhabi in general among British companies, investors and finance houses in the UK which was attended by representatives of the 100 major largest companies, experts and financial analysts, investment funds, pension funds as well as Portfolio Managers of major companies in UK. Mr. Rashed Al Baloushi, Acting Director General of ADSM, said: "The organization of this presentation in London, comes following to ADSM board of directors recognition of the importance of strengthening partnership with listed companies, and to support them in growth as well as meeting challenges in order to attract more foreign investor, foreign investment funds as well as foreign portfolios' Managers to invest in ADSM and take advantage of available opportunities. ADSM delegation who organized this road shows comprised of representatives of major listed companies in the market like Aabar Petroleum Investment Co, Al Dar Properties, Dana Gas, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Abu Dhabi National Energy Company, Oasis Internal Leasing Co, and RAK Properties, Sorouh Real-estate, and Emirates Foodstuff & Mineral Water (Agthia) (Williams, 2007).

Mr. Al Baloushi also presented to the representatives of British companies a detailed explanation about ADSM activities and achievements as well as its legal rules and regulation applied, which is one of the best globally. In addition, he provided a briefing concerning ADSM's future plans and its continuous pursue to be the best market in the region and to lead the process of capital market development in UAE (Abu Dhabi Securities Market, 2007). In addition, presentations were made to the participants concerning the investment opportunities and projects expected to be implemented in the next five years with an estimated value of hundreds of billions of which these projects will provide investment opportunities for British companies, Investment funds, and Pensions. It will also contribute in attracting foreign direct and indirect investment in a way that support activities of financial markets in UAE. During the road shows, there were 200 meetings in a series of joint meetings between representatives of ADSM listed companies with representatives of the 100 largest British companies and a number of financial analysts, representatives of British investment funds, where they presented an analytical presentation of their data and corporate and future plans as well as investment opportunities available in these companies. (Abu Dhabi Securities Market, 2007)

The questions and inquiries of representatives of financial companies and British investment focused on the expectations of growth and increase in number of listed companies and the sizes of the IPO expected during the coming period. They highlighted on the importance of disclosure of information and decision-makers in these companies for the research and facilities provided in this regard along with ADSM support as well as the relevant parties in the financial markets in UAE. Most of the financial and investment companies, Pension funds in UK expressed their desire to invest in ADSM and take advantage of investment opportunities. ADSM delegation welcomed the intention of British companies to invest in the market assuring their support and readiness to provide all possible facilities to ensure the success of these investments, as well the necessary support to guarantee the continuation and growth in order to achieve the desired results (Abu Dhabi Securities Market, 2007)

The road shows were attended by intense media representatives and British newspapers agencies, which have devoted large areas to cover this event and highlighting ADSM financial opportunities offered to foreign investors. The road shows come following the recent signing of several memorandum of understanding with global exchanges, including Hong Kong and Singapore, and the cross-listing agreement with the Lahore Stock Exchange, which will enable around ten Pakistani companies to list in ADSM during the current year. Statistics show increasing of institutional foreign investments entered in Abu Dhabi securities market during the past which lifted net foreign position to about 2.5 billion dirham during the first few months of year 2007 (Abu Dhabi securities market, 2007).

Chapter Three: Methodology

To achieve the above-stated research goals, this study employed a critical review of the relevant peer-reviewed, scholarly and organizational literature. This approach is congruent with a number of social researchers. For example, according to Fraenkel and Wallen (2001), social researchers normally investigate the relevant literature to find out what has already been written about the topic they are interested in investigating: "Both the opinions of experts in the field and other research studies are of interest. Such reading is referred to as a review of the literature" (p. 48). This point is echoed by Gratton and Jones (2003), who emphasize that a critical reviewing of the timely literature is an essential task in all types of research projects: "No matter how original you think the research question may be, it is almost certain that your work will be building on the work of others. It is here that the review of such existing work is important. A literature review is the background to the research, where it is important to demonstrate a clear understanding of the relevant theories and concepts, the results of past research into the area, the types of methodologies and research designs employed in such research, and areas where the literature is deficient" (p. 51). For this purpose, Wood and Ellis (2003) identified the following as important outcomes of a well conducted literature review:

It helps describe a topic of interest and refine either research questions or directions in which to look;

It presents a clear description and evaluation of the theories and concepts that have informed research into the topic of interest;

It clarifies the relationship to previous research and highlights where new research may contribute by identifying research possibilities which have been overlooked so far in the literature;

It provides insights into the topic of interest that are both methodological and substantive;

It demonstrates powers of critical analysis by, for instance, exposing taken for granted assumptions underpinning previous research and identifying the possibilities of replacing them with alternative assumptions;

It justifies any new research through a coherent critique of what has gone before and demonstrates why new research is both timely and important.

Likewise, Silverman (2005, p. 300) suggests that a literature review should aim to answer the following questions:

What do we know about the topic?

What do we have to say critically about what is already known?

Has anyone else ever done anything exactly the same?

Has anyone else done anything that is related?

Where does your work fit in with what has gone before?

Why is your research worth doing in the light of what has already been done?

Finally, both primary and secondary data were used in this study. According to Dennis and Harris (2002), "Secondary data are information that has been collected earlier for a different purpose, but which may still be useful to the research project under consideration. Census data are a good example of secondary data, and of course the Internet can be searched by key words entered in search engines to obtain secondary data on a huge range of subjects" (p. 39). Locating the information needed to answer a particular research question from secondary data avoids the need to spend time and money on primary research; however, the potential of finding an ideal match is remote (Dennis & Harris, 2002). These authors point out that primary data are information that is being collected for the first time in order to address a specific research problem. "This means that it is likely to be directly relevant to the research, unlike secondary data, which may be out of date or collected for a totally different purpose. Ideally, an effective research project should incorporate both primary and secondary data" (Dennis & Harris, 2002, p. 39).

Chapter Four: Data Analysis

Determination of Efficiency of Abu Dhabi Stock Market

According to Balling, Lierman and Mullinex (2004), the issue of whether causality runs from finance to economic growth or the other way around was specifically addressed in a study by Rousseau and Wachtel (2000) that used a panel of 47 countries; these researchers determined that there is support for the concept that bank-sector size and stock market efficiency cause economic growth and determined that the effect of stock market size is weak at best. Other researchers, though, have identified mixed results using a single-country time-series methodology and found bi-directional causality between bank-sector size and economic growth in each of the ten sample countries analyzed (Balling et al., 2004). According to an analysis of stock markets in the Middle East, the Makaseb Funds Company reports that, "After consecutive years of dramatic market returns, the major markets in the Middle East stand where they began 24 months ago. A giddy sense of euphoria in 2005 and abject despair in 2006 were extra bonuses for investors who came along for the ride" (Random walk, 2007, p. 1).

Table ____.

Regional Stock Market Returns.

Market Return

FY2004

FY2005

FY2006

Abu Dhabi

75%

69%

42%

Dubai

44%

Qatar

65%

70%

35%

Oman

24%

44%

14%

Saudi Arabia

85%

53%

Bahrain

33%

24%

Kuwait

38%

79%

13%

Source: ADSM, DFM, DSM, MSM, Tadawul, KWSE, BHSE in Random walk, 2007.

Figure ____. Regional Stock Market Returns.

Source: Based on tabular data in Random walk, 2007.

Based on the growth in activity across all markets during this period, the numbers of passengers on this ride has been significant.

Table ____.

Trading Activity in Regional Markets.

Value Traded (USD in bn)

FY2004

FY2005

FY2006

UAE

Qatar

Oman

Saudi Arabia

Bahrain

Kuwait

Source: ADSM, DFM, DSM, MSM, Tadawul, KWSE, BHSE in Random walk, 2007.

Figure ____. Trading Activity in Regional Markets.

Source: Based on tabular data in Random walk, 2007.

Based on the foregoing, during a period when markets were rising rapidly, companies were net sellers-both in the primary and secondary markets: "The belief here is that this extra supply acted as the catalyst that unraveled the whole upward spiral. The perspective here is that though it is useful to dissect the last couple of years, what is much more useful, and indeed should prove rewarding, in forming an investment strategy for 2007. However, it is not possible to do so without first understanding fully the dynamics of the bull market in the Middle East over the past few years, and the subsequent pull back" (Random walk, 2007, p. 3).

Figure ____. WTI Brent Closing Price (USD/Bbl): 1983-2005.

Source: Random walk, 2007.

Figure ____. Gulf Cooperation Council (GCC) Revenues & Expenditures.

Source: Random walk, 2007.

The primary driver has clearly been firm oil prices, which in turn have boosted government revenues and spending, as shown in Figure ____ above. The swing has been decisive, with the Gulf Cooperation Council (GCC) sates running substantial surpluses from 2003 onwards, after years of persistent deficits.

Figure ____. GCC Current Account Balance.

Clearly, the one major driver for the region has been higher oil prices. Significantly higher oil revenues have provided fiscal space to regional governments (primarily Saudi Arabia) to cut domestic public debt, and increase spending, without crowding out the private sector. This is quite evident from the rapid increase in private sector credit in the region, as participants in the economy have geared up to execute government spending plans. While it is true that fiscal discipline across the board has been impressive, government spending has continued to underpin higher economic growth. A majority of the GCC countries have sufficient room to maintain current spending without going into deficit even if oil prices weaken substantially from the current mid 50s (WTI Brent). The interesting bit is the medium term outlook for oil prices, given the investment boom in the sector over the past few years. The lead time for energy sector investment is fairly long (a modern oil refinery takes anywhere from 5 years or longer to become fully operational, depending on configuration details) and the period is quickly being approached when some additional capacity is likely to start coming on stream over the next couple of years (Random walk, 2007).

Table ____.

Oil & Gas Investment in the Region.

Country

No. Of Projects

Value of Projects (USD in bn)

Kuwait

Saudi Arabia

UAE

Oman

Bahrain

Qatar

Source: Zawya cited in Random walk, 2007.

The belief here is that oil prices generally have moved sharply in response to supply shocks, rather than demand. A case in point is when oil prices hit bottom around 1998, at a time when the global economy was doing very well, and demand growth had been robust. The current oil bull market has been on a slow boil for several years principally because of a rapid slowdown in energy sector investment resulting in a tight supply situation eventually. A case in point is the strength of refining margins in the recent past, indicative of bottlenecks in the supply chain.