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A Bedouin proverb says that a good idea’s worst enemy is its bad implementation. Perhaps no other phrase is more apt than this one to describe what has been happening in Dubai lately. The concept of a regional financial hub operating according to international best practice and based in one of the Middle East’s most enlightened locations made a lot of sense for a lot of reasons. It still does. Too bad that this has been hobbled by inept management; hopefully, not for long.
It is unfair, as some in the international media have been doing, to blame Sheikh Mohammed bib Rashid Al Maktoum for what is currently transpiring in Dubai. He and his late father literally made today’s Dubai out of nothing, and anyone who has seen the place back in the late 1970s or early 1980s knows what I am talking about. Sheikh Mohammed’s job was done a long time ago; once he laid down the groundwork, provided the necessary political support and put the emirate on a developmental track with forward momentum in a manner that is not only unique in the Middle East but in the world. It was up to the administrative layer below him, the next echelon in the Dubai hierarchy, to make sure that wagon is moving at the right speed and in the right direction.
It is that second tier in Dubai Inc., the so called lieutenants, who should have known better. They are the ones with degrees from Western universities and work experiences with international institutions. They could have coordinated amongst themselves; after all, there was only a handful of them.
Apart from real estate, another area that will witness ramifications from Dubai’s debt problems is the exchange sector. The fate of Dubai’s investments in this sector is currently hanging in the balance. How this will unfold will play a decisive role in what will happen to exchanges and stock markets not just in the Middle East but also in Europe and the United States.
Perhaps there is no better place to start this story than with the birth of the Dubai International Financial Exchange, or DIFX. In my humble opinion, DIFX was dead upon arrival. It was launched with the wrong set of assumptions: that in an exchange setting, if you build one, they will come. Liquidity cannot be created out of a vacuum and DIFX did not provide the necessary narrative as to why anyone should list or trade on it. And after all, there was/is a successful local exchange, the Dubai Financial Market (DFM), and a regional/international dimension could have easily been added to it.
Back in early 2007, the idea of Dubai acquiring a stake in OMX, the Swedish exchange, made sense. OMX had bought systems of a Canadian company by the name of EFA and those systems were widely used in the Mideast. Playing the liquidity integration game in the region was an important step towards becoming a successful financial hub and OMX had the technology that was compatible with what was being used in the neighborhood. Additionally, OMX had successfully created joint liquidity pools in other regions.
Provided that such an acquisition was structured properly, it would give Dubai exclusivity for the OMX brand, technology and business model in the Middle East. It was a low cost approach based on a rational strategy to turn Dubai into a regional liquidity node.
However, this approach coincided with another development. Nasdaq’s failure to buy the London Stock Exchange prompted it to go after OMX and the famous bidding war between Dubai and Nasdaq ensued. To make a long story short, and as a result of a complicated deal between Nasdaq and Dubai, Dubai currently owns around 20% of the London Stock Exchange and controls around 30% of Nasdaq. Given the emirate’s cash needs, what will happen to these holdings?
There has been speculation that Dubai will undergo a fire sale of some of its investments, given its current debt burden. Whether this will happen or not has yet to be decided and depends to a considerable extent on its current talks with Abu Dhabi. But if a fire sale of Dubai’s holdings does take place, will this include its exchange investments? What is at stake is not only the financial wellbeing of Dubai but the shape of the European exchange landscape as well. Consider the possibilities...- NYSE Euronext currently owns around 20% of Qatar’s stock market and Qatar currently owns around 15% of the LSE. Qatar could buy Dubai’s 20% stake in the LSE and team up with NYSE Euronext to make a bid for the LSE.
- Nasdaq OMX could make an offer to Dubai to buy the latter’s stake in the LSE and make a new offer to buy the LSE.
- Deutsche Borse could buy Dubai’s stake in the LSE and make an offer to buy the LSE.
- Deustche Borse could buy Dubai’s stake in Nasdaq OMX and make an offer for the latter.
- Abu Dhabi could purchase a substantial majority of Borse Dubai, the entity that controls Dubai’s exchange investments. Borse Dubai owns Dubai’s LSE and Nasdaq OMX stakes, among others. Abu Dhabi would then have a powerful option in its hand: it could play the international exchange consolidation game, depending on which side it wants to tilt towards: Nasdaq OMX, LSE, NYSE Euronext or Deutsche Borse.
What will any of these possible scenarios mean for the future of DIFX, now dubbed Nasdaq Dubai? That exchange is neither a node nor niche at present. It has not been able to specialize nor has it been able to catalyze the integration of some of the liquidity pools in the region. Neither is it integrated into any international liquidity stream. And merging DFM and DIFX/Nasdaq Dubai is not so easy. The two exchanges operate in different regulatory environments.
What is clear is that the international stock market drama that peaked in 2007 is not over yet and the fat lady has still to deliver her aria. Let us hope it will not be a Puccini opera!
