Nov 23 - 29, 2009

The tiny Persian Gulf emirate, Dubai, has long cherished and strived to put itself as an international finance and trading center within today's global economy. It raised an ultra-modern image, with luxury hotels and resorts and high-profile sporting events. But in the backdrop of global financial meltdown in US subprime market, Dubai passed the worst of the economic downturn. The global credit crunch has hit Dubai's economy very hard and sent the emirate's once-flourishing property sector into decline. Dubai once an international magnet, and a financial capital was grabbed by the global crisis and boom busted. Emirate's economy has witnessed a breakneck growth mainly due to property sector, abundance of cash from oil windfall and foreign investments.

Recently, in an attempt to fast recovery Dubai raised $10 billion in emergency cash from the UAE's central bank in the first half of 2009, through a bond issue as part of a plan to raise a total of $20 billion, setting up a support fund to manage the proceeds. The financial and economic conditions of Dubai are still strong enough to pull through the adverse conditions. It seems that in the long run the global economic crisis will not deter Dubai's ambitions of implementing its development plans. Many areas have now seen flickering signs of recovery.

Despite having cushion in certain areas Dubai is heavily indebted to financial institutions. The emirate has at least $48.3bn to pay off over the next three years: $13.1bn in 2010, $19.5bn the following year and $15.7bn the year after that. The ability to manage debt repayments comfortably over the next 12 months is contingent upon selling its next $10bn bond before the end of the year. But the medium-term outlook is more troubling, and the level of debt is likely to prove too big for Dubai to get out of indebtedness by itself. It is pertinent to relate that Abu Dhabi and the UAE federal government will remain Dubai's lenders of last resort.

According to Richard Thompson, editor of the Middle East Economic Digest, the region is starting to react to the economic downturn. Dubai has moved to stabilize its economy with its $20 billion sovereign bond program. For the short term, it should be sufficient to meet the city's refinancing needs this year and lend stability to the economy. There are reasons to be cautiously optimistic here.


Dubai's economic woes are directly attributable to the collapse of its real estate sector amid the global liquidity crisis. During previous years property prices in Dubai were surging to record peaks undeterred by a real estate slump in major markets, but they have since gone into freefall and have yet to find the bottom. More than half of the construction projects in the United Arab Emirates, worth $582 billion, have been put on hold. Some projects are still going ahead primarily due to the $10 billion bailout from the UAE's capital, Abu Dhabi.

Nevertheless the analysts are now seeing betterment in the days ahead and expect stability in the first half of 2010. Prices in the recently completed up market neighbourhoods on the palm-shaped island Palm Jumeirah, which took a severe beating after shooting to record levels, rose slightly in the second quarter as investors with cash appeared to jump on bargains.

The prices of villas and apartments on the Palm have risen respectively by 20% and 7.0% in the second quarter of 2009, compared to the first quarter. Any economic recovery in the emirate will be contingent upon an upturn in the property market, which is unlikely to happen soon as potential buyers remain cautious.


Dubai's stock market suffered badly this year. The market could tumble to the same level that it started at in 2004 with the worst-hit sector being properties. The prices have fallen substantially, particularly for projects where completion dates are a long way off. These properties were popular with speculators, but this market is now very dead. There continues to be strong demand owing to population pressures, but the availability of financing is the problem. Finance providers have tightened credit criteria as they seek to reduce exposure to the sector and tackle their own liquidity problems. Interbank lending across the Gulf Arab region continues to stutter despite a pickup in government and quasi-government bond issuance as overseas investors look for high-rated emerging market paper.

The UAE government and that of Dubai have succeeded in stabilizing the banking sector and restored depositors' confidence in the system by adopting fiscal and monetary policies and measures that counteracted and contained the impact of the global crisis on the domestic economy. Liquidity was provided to the banking sector. The governments guaranteed all deposits at all banks in the UAE as well as interbank deposits. In particular, Dubai's bonds have contributed immensely in this regard.


The Middle East has faced its biggest challenge in years, with the worst financial crisis since the 1930s threatening oil exporters, but investor appetite is returning after state intervention and recovering crude prices. A recent report by HSBC confirms that Abu Dhabi has the cash liquidity to support its own banks and property companies. Therefore, Abu Dhabi is likely to use some of this liquidity and stability to help prevent a complete collapse of markets in Dubai. The UAE's central bank has already confirmed that its board has discussed plans to launch facilities for supporting real estate lending in Dubai, as well as in the rest of the UAE. There is an uncertainty about how long the credit crisis will last. However, Dubai is optimistic of oil prices returning. Banks should start leading at the latter half of this year when the bailouts start filtering through. There will be a very quick rebound in Dubai. Dubai should use this crisis to rebalance its economy away from real estate and allocate its funds to more productive industries.