DUBAI - ECONOMIC TURNAROUND IN SIGHT?

IMF WARNS OF SLOWDOWN IN UAE ECONOMY IN 2009

SHAMSUL GHANI (shams_ghani@hotmail.com)
Nov 16 - 22, 2009

World economic history is riddled with recessionary cycles. Occasionally such cycles assume horrific proportions to disturb the world economic order. Economies with enough buoyancy and robustness take big hits in their stride and after a few tumbles manage to stand their ground firmly. The economic resilience factor is the product of such variables as infrastructure, geographic location and accessibility, natural resource base, foreign investment policy, international trade links, currency strength, law and order situation, quality of life, recent economic trends etc.

Any economy with magnetic power to attract FDI cannot be held back for a longer period. Its onward journey resumes much earlier than that of the economies that are made of a less resilient economic fabric.

WHAT MAKES DUBAI ONE OF THE MOST ROBUST AND RESILIENT ECONOMY OF THE REGION BESIDES HONG KONG AND SINGAPORE?

Dubai is the most populous estate of the seven member estates that form the federation of UAE. After Abu Dhabi, it has the largest area. Situated on the southern coast of Persian Gulf along the Arabian Peninsula, Dubai has a strategically advantageous location that affords trade links with a 1.5 billion plus market comprising Gulf, Middle East, Africa, Central Asia CIS and Asian sub-continent. Its international trade has grown at an average rate of more than 11 per cent since 1988. It is connected to 130 global markets through more than 120 shipping lines and 85 airlines. It rightly boasts of an open economic system with no exchange control, no quotas or trade barriers and no protectionist tariff structure.

Perhaps the most significant positives are Dubai's political stability, top class infrastructure, visionary leadership and high-quality life.

The most important phase in Dubai's economic development came when oil was discovered in 1966 and the ruler decided to spend oil revenue on infrastructure development. A network of roads, hospitals, schools, shopping centers and hotels was created to attract foreign investment on one hand and to provide high quality life to the inhabitants. Telecommunication and transport were also expanded and upgraded on modern lines. It has been the visionary leadership of UAE rulers that has transformed Dubai into the world financial hub.

In 2008, Dubai was ranked as the top FDI destination by the London based Financial Times. During that year, Dubai attracted 342 foreign projects with capital investment of $21 billion. What prompted the adjudicators to confer this award was the fact that Dubai's foreign capital investment increased from $9 billion in 2007 to the said $21 billion in 2008. Although petroleum and gas played an important part in the development of UAE, and that too at a crucial time, the major sources of Dubai's revenue are real estate, tourism, and financial services.

Dubai has a zero income and corporate tax regime. Only oil companies and foreign bank operations are subject to corporate tax. Custom duties are very nominal which make Dubai a very attractive international re-export centre.

Having a low revenue contribution by the oil sector, the financial turmoil Dubai has recently gone through was caused much by the real estate and financial sectors rather than the oil sector. The major oil producing economies were hit hard by the nosedive of oil prices from $150 a barrel to $30 a barrel during a short period of less than six months.

2008 was a mixed year for the UAE economy. Record high oil prices during the first six months coupled with the growth recorded by other major revenue generating sectors put the economy on a high. The second half of 2008, however, produced some high power economic shocks. The collapsed oil, real estate and financial sectors put a big question mark on the resilience of once invincible Dubai economy. The capital investment outflow posed serious liquidity problems. The much-heated real estate market collapsed. Most of the investors recorded losses and pulled back their leftover money from the market.

The real estate giants got a battering on the stock market as well with Emaar and Deyaar Development stocks recording a fall of 61 and 57 per cent respectively, during the current year. Highly leveraged real estate investments triggered a cycle of defaults putting strain on banks liquidity and credit outflow. The leading mortgage lenders tried to take refuge under mergers. UAE government's injection of $33 billion liquidity and guaranteeing of all bank deposits coupled with the central bank's corrective measures stemmed the rot largely.

The year 2008 recorded a real GDP growth of 7.4 per cent. This particular year had a complex structure of economic events and can therefore be hardly relied on for providing some sort of growth yardstick for the years to come.

General estimates for the year 2009 speak of a 2 to 3 per cent growth. An IMF report warns of an impending economic slowdown in UAE economy with fears of 38 per cent erosion in real estate prices during the year 2009. This is likely to result in much lower loan paybacks making the banks liquidity issue more serious. As happens in such situations, bank credit outflow has been seriously hampered. The benefit of central bank's cut in policy rate has not been passed on to the UAE market as few loans have been written at lower interest rates. The UAE inter-bank rate came down to 3.1 per cent but remained sufficiently higher than the benchmark repo rate of one per cent.

With strong economic fundamentals developed over the last three decades, the UAE economy is set to shrug off the effects of global financial meltdown. An economy developed under visionary leadership over a long period is not going to succumb to cyclic international pressures. Although 2009 is going to be a comparatively bleak economic year, Dubai economy is going to resume its unprecedented growth journey from 2010. These are not mere speculations. The built-in strong reservoirs have already managed to protect the economy from a sharp downturn.

How can an economy having a huge current account surplus of $285 billion can be expected to give in to the international dwindling demand pressure? The oil prices have rallied back to $80 a barrel level, the strong infrastructure is intact, the legendry political stability promises policy continuation, the law and order situation is still ideal, the quality of life is enviable, the inflationary pressure has subsided, the government stands to protect the financial system at all costs. What else is required to get the economy moving once again?