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Comparing the Financial Markets of the US and the UAE
A market is basically defined as a central or common place, whether physical or virtual, where sellers meet buyers and vice versa for the common interest of determining prices followed by transacting goods and services businesses. From this definition, a financial market is understood as a place or platform where individuals, firms, companies, and even governments come into agreement and enter into law abiding contracts to sell or buy specific products, which takes a form of bond, stock, or any other kind of investment.
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In the financial market, just like in an ideal farmers market, buyers wish and strive to buy goods at the lowest possible prices, and sellers, on the contrary, strive to sell at the highest bargain possible (Frumkin, 2000). This paper seeks to explore the financial markets of the US and the UAE through specifically comparing two financial markets. This comparison will majorly be made on the basis of the financial regulations, the fundamental stocks traded by these two markets, the economic indicators that are important to each of the markets, the differences existing in the Central Banks organizational structures for both countries paying attention to the manner in which the institutions control the financial markets, and the relationship that exists in two financial markets in question. Finally, this paper will explore the effect of an increased demand for USD on the UAE financial market and how crisis emanating from the financial market of the US would affect the UAE financial market.
Important Financial Market Regulations
In general, there are two major regulatory schemes, and there are three regulators in the UAE. Traditionally, it was under the domain of the Central Bank of the UAE to regulate both securities trading and all transactions revolving around investment products. The financial market of the UAE is relatively young and rather small if compared with other financial markets that have developed for decades (e.g. the US financial market). The UAE market was officially started in 2000, and it was initially a representation of two major stock markets of the government, those of Abu Dhabi and Dubai (Mishkin & Eakins, 2006). In the same year, another regulator, the Emirates Securities and Commodities Authority (SCA), was created. Nowadays, the latter and the Central Bank are the two major regulators. They operate under the federal regulatory scheme of the UAE.
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The financial markets and securities regulation in the UAE is usually confusing to financial institutions and investors due to the lack of clear division and outline of responsibilities between two regulators. In addition, there exists an independent regulatory scheme that operates in the Dubai International Financial Centre (Hammoudeh & Choi, 2006). DIFC by itself is a zone that is financially free and sits in the emirate of Dubai. It has a separate regulatory and legal structure that is unique to itself. This regulator is referred to as the Dubai International Financial Services Authority.
In the US, securities regulation is realized in two main methods. The first method is keen on prohibition of particular manner of conduct by the parties participating in the financial market. The second approach focuses on the requirement of disclosing all relevant information regarding market participants as well as information on securities. Great emphasis is put on disclosure so as to mitigate any conflicts of fraud, interest, and attempted manipulation of the market (Mishkin & Eakins, 2006).
The initial design of securities regulation aims at ensuring that all market participants are able to access the relevant information concerning the market, thereby they end up making informed investment decisions. The examples of stock markets in the US are the New York Stock Exchange and the Chicago Mercantile Exchange. These institutions are overseen by the Securities and Exchange Commission (SEC). The latter is responsible for regulating public companies and is also mandated with registration of firms that intend to engage in securities trade. It is also mandated with registration of various classes of participants in the securities market. Futures exchanges trading are overseen by the Commodity Futures Trading Commission (CFTC) (Kamal Hassan, 2009). It is important to note that SEC and the CFTC do not affect in general or regulate in any way the stocks or futures prices. In a nutshell, these commissions regulate membership, trading rules, market manipulation by participants, interest conflicts, and organization of the exchanges.
Important Securities that Are Traded Commonly and Differently
Securities traded in the US and the UAE cut across various sectors that range from real estate and banking sector to insurance sector in both countries (Al-Tamimi, 2006). The table below depicts various firms that have listed their securities in both the US and the UAE financial markets.
Table 1: Dubai Securities
|1. National General Insurance||1. Union Properties||1. The Bank of Mashreq|
|2. Oman Insurance Company||2. Emaar Properties||2. National Bank of Dubai|
|3. Dubai National Insurance||3. Emirates Bank International|
|4. Arab Insurance Group||4. Commercial Bank of Dubai|
Table 2: US Securities
|1. The progressive Corp||1. Stratus Properties||1. JP Morgan Chase & Company|
|2. Loews Corporation||2. St. Joe Company||2. Wells Fargo & Company|
|3. The Allstate Corporation||3. Bluegreen Corporation||3. Wachovia Corp|
|4. Metlife, Inc.||4. St. Joe Company||4. US Bankcorp|
|5. Hartford Financial||5. Consolidated Tomoka Land Co.||5. Bank of America Corp|
|6. Prudential Financial||6. Thomas Properties Group||6. Washington Mutual, Inc.|
The Dubai financial market has thirty five (35) listed firms only due to its young age. There are only three major sectors that take the chunk of the stock market as shown in the table above. The US market, however, has more sectors and more listed firms than the UAE one. Some of the sectors listed in the US financial market missed in the UAE market are manufacturing, agriculture, energy, and mining. This is mainly attributed to the fact that the US financial market has been in operation for a very long time and has come of age (Marashdeh & Shrestha, 2008).
Important Economic Indicators
Economic indicators refer to key statistics on economic activities that are a depiction of the direction that the economy is taking. Important economic indicators for both the UAE and the US are:
a) Growth rate of GDP. This is the rate at which the gross domestic product is growing. It is usually taken to indicate how fast or slow a given economy is growing.
b) Interest rate. This is very fundamental driver as far as the forex markets are concerned. The central bank usually sets the base rate and uses it as an economy managing tool.
c) Balance of trade. It is a measure of trade surplus or trade deficit in a country recorded and reported on monthly basis. For instance, the US recorded a trade deficit in July, 2016, while UAE recorded trade surpluses during the same period (Trading Economics, n.d. b).
d) Unemployment rate. It refers to the percentage of qualified workers who are unemployed. It is a measure of the number of qualified workers who are actively seeking for jobs recorded as a percentage of total labour force.
e) Inflation rate. It refers to a measure of how slowly or fast the prices of products rise over a certain time period. It seeks to indicate the changes occurring in consumer prices. In the US, the latter increased by 1.5% in September, 2016 year on year, while it increased by 0.6% in the UAE over the same period (Trading Economics, n.d. a).
f) Debt of GDP by government. This performance indicator is normally used by investors as a measure of how the country is able to settle its debts in the future.
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Compared with the US, the UAE financial market is devoid of posting information regarding some of its economic indicators. For instance, the US has posted three entries under market, which are stock market, currency, and government bond 10Y, while the UAE has only posted two entries: currency and stock market. Under GDP, the US has posted sixteen entries, whereas UAE has posted seven entries only. On top of the GDP growth rate, annual GDP growth rate, GDP constant prices, GDP, GDP per capita, GDP fixed capital formation, and GDP per capita PPP-based posted by the UAE, the US has gone ahead to post GDP accrued from transport, services, utilities, manufacturing, agriculture, construction, mining, and public administration (Al-Tamimi, 2006). Under labour, the US has posted thirty six entries, while UAE has only posted a couple of entries, namely population and unemployment rate. As such, it is clear that the UAE lacks for so much information on their economic indicators compared with the US, and that the US is more detailed and more elaborate in its presentation of economic indicators. Therefore, the investors will have hard times trying to make investment decisions in the UAE as compared with the US.
Difference between the Organizational Structures of the Central Banks in both Countries
The organizational structures of the Central Banks of the US and the UAE differ in the manner through which they regulate and control the respective financial markets. The Central Bank of the UAE is mandated with regulating the trade of foreign securities (Al-Muharrami et al., 2006). It also has major influence on the financial market mainly through licensing. Moreover, it oversees various financial institutions within the country including banks. The Central Bank of the US is not as actively involved in the regulation of financial market if compared with the Central Bank of the UAE. This happens due to the fact that in the US, the Securities and Exchange Commission is mandated with regulating most of the public companies that are listed in the stocks market (Nier, 2009). The Central Bank basically oversees the operation of SEC and keeps it in check.
Relationship in the Financial Markets of the US and the UAE
There is a great bilateral relationship between the US and UAE in their financial markets. The UAE uses the US dollar as the international currency for trading. Also, the US import petroleum and most of the petroleum products from UAE. Further, the UAE has become the largest export market for the US products in the Middle East. For instance, the US exports to UAE increased from $3.6 billion in 2002 to $12.1 billion in 2009. In the same year, the surplus trade goods from the US was $10.6 billion; this was ranked as the fourth bilateral surplus in terms of the economic relationships between the US and other countries (Neaime, 2012).
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Furthermore, the US report the highest direct investment into the UAE, $3.4 billion in 2009. This further clarifies the strength of the relationship between two countries. The interdependency between the US and UAE in the financial market can be said to be of mutual benefit, but the UAE financial market depends slightly more on the US financial market due to the use of the USD as the international trading currency (Moran, 2012).
The following are some examples further elaborating the depth of the relationship between the US and the UAE:
To start with, Westinghouse has undersigned to take part in a South Korean consortium that needs $20.4 billion for four nuclear reactors in the UAE, targeted to provide commercial energy production. Secondly, the Abu Dhabi Aabar Investment signed a contract with the US to inject $20 million in XOJET airline in February, 2010. Thirdly, The Abu Dhabi Investment Authority also bought eleven percent of shares from the US company named Hyatt Hotels Group in the last month of 2009 (Looney, 2014). Fourthly, two United States companies, namely Mubadala Development Company and General Electric, agreed to develop centres in the UAE to offer training to future leaders in business. Last but not least, the Abu Dhabi government joined efforts with the University of New York in December, 2009 and opened a University of Liberal Arts in Abu Dhabi. This university is the first of its kind to be developed by the main research university in the US (Looney, 2014).
Drawing conclusion from the above discussion, we can sum up that the United States and the UAE have strong bilateral relationships which lead to the relationship in their financial markets. The UAE financial market slightly depends on the US one mainly because the US dollar is the major international currency that affects all the nations depending on it in terms of doing international business. The UAE country needs the US as a major partner in oil trade. In case the UAE established their currency for international trade, the US would be dependent on the UAE.
The UAE is a Country which Currency Is Pegged to the US Dollar
The increased demand for USD will reduce the international demand for AED (UAE dirham). The global demand for US dollar in order to purchase oil will lead to its increased value, which will lower the price of the oil with the local currency as a result (Momani, 2008). For instance, if the current benchmark for oil is 250 AED/barrel, the same barrel will cost 80 USD in the international market. If the demand for USD increases (which strengthens its value), it means that it is possible to buy for one dollar more than it was previously purchased. This means the price of the crude oil drops. However, this is not the case with the UAE currency due to the protection from the fluctuations by pegging the AED to USD.
The UAE Central Bank incurs the cost of fluctuation to ensure the exchange rate (Dh 3.672) remains almost unchanged. In case when the demand for USD increases, it translates to dollar appreciating, thus causing the extra cost and providing higher purchasing power for people exchanging dirham to dollars. This directly translates to low demand for dirham as people need USD in the international trade of oil (Khan, 2009).
How a Crisis in the US Financial Market Can Affect the UAE Financial Market
The US financial market crisis will have minimal effects to the UAE financial market. Unlike the investments in the US, ninety five percent of the UAE investments are small and medium-sized companies owned by families, enjoying the benefits of family equity rather than depending on international capital markets (Neaime, 2012). Therefore, the impact of the US financial market crisis is believed to be mild. This impact might further be limited through reduction of global demand for re-export goods.
Nonetheless, there is an alarming need to ensure that the minority shareholders are protected from being bankrupt and moderating continued development of financial markets. There should be properly constructed laws and regulations to facilitate implementation of the above recommendations with the set institutions to manage and internalize them. Despite this, the UAE is in a very save position. The economy of the UAE is isolated from the US market to a considerable extent. It is more oriented to the Asian markets, thus further reducing the impact from the US financial market crisis (Neaime, 2012).
The UAE can be categorized as the net exporter of direct investments to the foreign markets. This increases the significance of the UAE economic assimilation capacity and potential for growing. This is especially evident within the Gulf Cooperation Council. In addition, the UAE contrasts with the US in the manufacturing sector. Thus, the industrial system needs huge amount of capital investments to properly function. On the contrary, the UAE economic systems are highly flexible (Khan, 2009). For instance, Dubai is categorized as a commercial hub as opposed to a production area that needs huge investments in the long term.
The other advantage of the UAEs financial market is the support offered to banks by the national government since the latter has been previously exercised co-owned equity. The banks became major international financial players with the huge profits made, thus enjoying steady growth which provided them with huge reserves (Looney, 2014).
The financial market of the UAE experience minor effects from the US financial market crisis due to the less dependence of the UAE banks on foreign financial markets. According to the Central Bank of the UAE, the banks financing from external financial markets to the total assets of the bank is less than 9.9 percent as for the European Commercial Paper (ECP) as well as medium-term notes (MTN), while interbank deposit to the total assets is approximately 12.7 percent, the bigger percentage of which belongs to the UAE banks (Al-Tamimi et al., 2011).
In the past, the economy of the UAE has undergone a number of financial crises, which it successfully solved. The secret to the capability of this economy is a very high percentage of flexibility provided by the young and dynamic economy. For instance, the UAE do not have the citizens worry about the unemployment issues which stands at about 2.58 percent, with Dubai having the lowest unemployment rate of 0.30 percent. The main worry is mostly based on the lack of qualified labour (Stein, 1991).
From the above discussion, it is no doubt that the financial market is a critical and fundamental component of the economy of any country. It is also evident that different countries have different securities they trade in. Such securities being traded in and determined by the time the financial market has been in operation, the number of sectors in operation in a given countries, and the number of firms that have been listed in the financial market are extremely important in terms of the financial market. Moreover, it is very critical to regulate the financial market. According to the above mentioned issues, the importance is emphasised by the commissions set up in the US and the UAE in order to monitor and regulate the financial markets. There also exist ways in which interested investors are able to access the viability of a financial market so as to enable them to make informed and wise investment decisions. The currency being traded in is also a critical bit of any financial market more so when this currency is pegged to another. The effect of the demand for a currency which has been pegged has also been discussed above. It was done to conclude this paper comprehensively, look into, and bring out a clear understanding of most of the aspects of financial markets.
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