On June 30, 2014, for the first time in six years, the stock market of Dubai saw it biggest monthly drop. The last time such an event took place was in November 2008. The stock market has had a decline of a quarter of its value in a period of two months, something that has never happened before. The decline in the stock market is attributed to the losses incurred at Arabtec Company, which has been undergoing restructuring changes for the past few months (Dodds, 2014, June 30). The General index was reported to have fallen to 3.942 percent from 4.4 percent. Real estate is said to have a major impact in the economy of the country. Therefore, the fall of Arabtec that is the major company in real estate meant that a fall in stock at Dubai stock exchange was expected. “In June 2012, shares in the Dubai stock exchange had risen by approximately 250 percent, making it one of the world’s best performing stock exchange markets up to its current fall” (Dodds, 2014, June 30) .
However, there were signs that the property market of Dubai were about to fall; this report was released by the federal central bank on June 8, 2014 after it imposed tougher mortgage rules and regulations for people who own more than two houses. Before the event, Dubai stock exchange had topped the Knight Frank’s global house index price for almost 12 months; this was after an increase of 38% in the first quarter of the year 2014. As the Arabtec group of companies is the leading organization in real estate, its fall meant that the whole stock market would be affected. At the beginning of the year, the CEO of the company resigned, and several other negative rumors about the company emerged, which led to the shareholders losing interest in the company. Later on, the National Bank of Abu Dhabi withdrew its guidance, followed by the majority shareholder Aabar Investment cutting its stake from 21.1 percent to 18.85 percent. These and other factors led to the fall in the stock of Arabtec, which in turn led to the fall of the stock of Dubai in general (Dodds, 2014, June 30).
On the global arena, the fall in Dubai’s stock means that local investors stand to lose as their investment is slowly loosing value. Firstly, international investors usually invest in dollars in United Arab Emirates. The fact that the stock is losing value means that fewer dollars will be diverted to the country, this means that the value of local currency will depreciate. As the investment is held in local currency, the international and local investors will experience loss due to a change in currency. Secondly, drop in the stock means that the shareholder value has decreased. The decrease in the shareholder value will scare away the international and local investors; this will most likely cause a further decline in the stock market if an intervention is not reached (Parker, 2014).
In the Dubai, the decrease in shareholders return means that firms will tend to increase market prices in order to offset the loss. As a real estate is the largest controller of the stock, this means that the prices of houses will go up further having a social and economic effect on the people. People will not be in a position to afford mortgages as before the stock decline happened. Increase in mortgages means that the prices of houses will go up in the area in order to cover the losses that the companies are anticipating to make. More homeless people are most likely to increase in the city. Life in the city will be more expensive triggering inflation rates to rise due to increase in price levels. For those who will not be in a position to face the financial crisis, they will be forced to move to areas that have low cost of living as opposed to Dubai.
The Dubai stock exchange event can be seen to be similar to the credit hunch that took place in the United States in 2008. Just as in Dubai, the real estate market controlled the stock market. The fall in the real estate market due to corruption and money laundering in the top companies led to the collapse of the economy of United States that affected the dollar in general. As the dollar is a major trading currency of many countries, the whole world followed into the global recession that followed thereafter. The event is most likely to happen again in Dubai if the National Bank or the World Bank does not do something about the real estate market of Dubai.
As is well known, the increase in the inflation levels in the country is likely to cause an outcry on the people of the country. The issue is most likely to be politicized that the current government is not doing its best for the benefit of the people. Some will claim that the National Bank of Abu Dhabi withdrew its support from Arabtec knowing exactly what will happen to the stock exchange. The government is expected to respond swiftly to the issue to avoid political tension in the country to rise as the cost of living will tend to increase due to a fall in the stock market.
References
Dodds, L. (2014, June 30). Dubai stocks suffer biggest monthly drop since 2008. The Telegraph [Dubai].
Parker, P. M. (2014). The 2007-2012 world outlook for real estate investment trusts. San Diego, CA: ICON Group.
Yunus, N., Hansz, J. A., & Kennedy, P. J. (0). Dynamic Interactions Between Private and Public Real Estate Markets: Some International Evidence. Journal of Real Estate Finance and Economics. doi:10.1007/s11146-010-9297-5
