Dubai: Post-crash

Dubai is still struggling to come to terms with the effects of its crash. Lower – but more sustainable – growth is perhaps the surest consequence. Published in Emerging Markets on 05/10/2010

Dubai, perhaps the most forward thinking of Middle East cities over the past decade, is having to turn back the clocks. From 2002 to 2008 the economy was carried along on a wave of speculative real estate deals but, since the boom ended, the emirate has had to piece together a new strategy.

The one that is slowly taking shape is likely to see Dubai focus on its former role as a trading and financial hub for the region. It won’t be as exciting, but it may prove more sustainable.

“Dubai’s economy has gone back to the basics of trade, logistics and financial services,” says Hamad Buamim, director-general of the Dubai Chamber of Commerce & Industry. “Downturns are an opportunity for economic rationalization and also an opportunity to refocus on our key competitive advantages. We expect Dubai’s economy will be more balanced in the future.”

It is all very different to what was anticipated just over three years ago. In February 2007 the ruler of Dubai, Sheikh Mohammad Bin Rashid Al Maktoum, launched the emirate’s Strategic Plan 2015. That document set a target for real GDP growth of 11% a year for the following 10 years. At the time, such ambitious targets seemed reasonable to some – after all, the economy had grown at an average rate of 13% a year from 2000 to 2005.

The government based its plans on six sectors: travel and tourism; transport and logistics; trade and storage; financial services; other professional services; and construction. All grew in the following years, but the emirate’s economy came unstuck because of the way that the last of these six eCvolved.

The construction and real estate bubble was more marked in Dubai than anywhere else in the region, accounting for as much as 24% of economic activity in 2008, according to the Washington-based Institute of International Finance (IIF). When that bubble burst, it did so more spectacularly than anywhere else – house prices have dropped by more than 50% from their 2008 peak, and the overall economy contracted by 3.5% in 2009 alone.

The Dubai authorities have often sought to link the onset of their problems to the global financial crisis. Other observers, however, say the economic model the emirate was pursuing was unsustainable – it was just a matter of time before the bust happened, with or without the downturn in other markets.

“They were moving too fast,” says Garbis Iradian, deputy director for the Middle East & Africa department at the IIF. “Even in the absence of the global financial crisis eventually they would have hit the wall.

“Any country expanding too much will come to this point and crash, and this is what happened in Dubai.”

The emirate is still struggling to come to terms with the effects of that crash, and in particular with the debt built up during that time. The Dubai government is thought to have debts of almost $45 billion, while local corporates owe a further $80–90 billion.

Perhaps the most troublesome debts have been those held by the government-owned Dubai World. It agreed a restructuring plan in September with almost all of its creditors for around $24.9 billion of debt. Dubai Holding, which is almost entirely owned by Sheikh Mohammed, has continued to defer repayments on some of its debts – most recently, on September 7, it agreed with creditors to extend a $555 million facility until November 30.

Between them these two groups control many of the largest companies operating in the emirate – several of which were heavily involved in the real estate bubble. Dubai World’s subsidiaries include investment firm Istithmar World, and property developers Limitless and Nakheel, among others. Dubai Holding owns hotel operator Jumeirah Group, investment firm Dubai International Capital and property firms Sama Dubai, Tatweer and Dubai Properties.

It will be some time before either group, or their troubled subsidiaries, have any chance of returning to their previous health, and indeed they may never do. But there is an expectation that the debt problems will eventually be dealt with.

“Dubai has no choice other than to reach a good agreement with its international creditors because there is massive debt that will need to be financed over the next four years or so,” says Brahim Razgallah, chief economist for the Middle East at JP Morgan. “Access to debt markets needs to remain open for Dubai corporates. In 2011 and 2012, Dubai corporates will have significant maturities they will need to refinance.”

Despite the lingering debt problems, some areas of the economy are continuing to show signs of health. Dubai International Airport had its busiest month ever this July, handling some 4.3 million passengers. Revenue and profits at port operator DP World were up in the first half of 2010, and the number of companies operating from the Dubai International Financial Centre (DIFC) has held steady this year, at close to 750.

It is on such foundations that Dubai will need to build its future.


“The underlying real economy in Dubai is about the provision and export of services, whether they are financial services, legal services, trade, logistics and other hub services,” says Simon Williams, chief economist at HSBC Middle East. “That’s always been the core to its real economy. It faces competition, and obviously its reputation has been impaired by the experiences of the last 12 to 18 months, but its economic case still has a bit of substance.”

Businessmen around the Gulf insist that Dubai will be able to revive its fortunes, often pointing to its infrastructure, which is better than anywhere else in the region.

“Dubai was planning it well, with good infrastructure,” says one Riyadh-based executive. “They wanted people to live there, but then the speculators came in and ruined it for them. I have confidence that they have the intellectual capital to fix the problem.”

“Dubai still has its own charm,” adds another Bahraini businessman. “People will still invest for a variety of reasons. Certainly Dubai will bounce back; it’s just a question of time. Irrespective of what has happened to Dubai, its infrastructure is still there and intact: the big airports, the roads, the metro. That’s all still there, and that will eventually pay off.”

Although it will take years to fully rebuild confidence in the emirate, there are signs that this optimism is not entirely misplaced. According to the FDI Confidence Index 2010, published by consultancy firm AT Kearney, Dubai is seen as the most attractive destination in the Middle East among international investors, ahead of Abu Dhabi, Egypt, Bahrain and Qatar.

However, even if it does manage to rebuild its reputation, economic growth will inevitably be far lower in the coming years. Most economists in the region now predict GDP growth rates of between 0% and 3% this year, although Razgallah is more bearish, forecasting a contraction of 1.8% this year followed by a further 1.5% dip next year.

“For this year, next year and at least the first half of 2012, there is a high probability that Dubai will underperform the region,” he says. “Private-sector demand is likely to remain very subdued. Most of the banking system is still facing a tough environment in terms of liquidity and exposure to Dubai corporates, so credit to the private sector is not likely to recover this year at least. However, over the medium to long term, I am more positive.”

The consensus among economists is that growth rates will rise over the medium term to between 4% and 6% a year.

“Growth rates will be lower but more sustainable,” says Marios Maratheftis, regional head of research at Standard Chartered Bank. “I don’t anticipate the 8%, 9% or 10% growth rates will come back any time soon, and nor do I wish them to. There is absolutely no need for the economy to be growing at those rates.

“I prefer growth rates of around 3% or 4% which are driven by economic activity, not by speculation and not by an asset bubble. Some people might view lower rates of growth as disappointing; I view them as sustainable.”


Estimating the prospects for the economy is made harder by the dearth of reliable statistics compiled or released by the government – a situation common to many developing economies.

“This is the major problem in Dubai – they didn’t know their situation, so it came as a surprise that debt was so high,” says Iradian. “Had they compiled good statistics on debt, they would have been more cautious.”

However, there are signs of improvement, with the emirate now appearing more open and willing to communicate with international investors and others.

“It was the secrecy over the debt and the lack of information that led to the problems earlier last year,” says Maratheftis. “Poor communication caused a lot of volatility. In terms of the debt, there is more openness now.

“Dubai has improved the way it is communicating with the market. Data availability has also improved. In the past we were not getting regular inflation numbers, for example. Now we see regular inflation updates for Dubai and the whole UAE – but we need to see more in terms of transparency and governance and accountability. When it comes to GDP numbers, we still get only one number for the full year, and we get it six months into the year after.”

There are also often calls for a tightening up in the country’s regulations, to make them clearer and to narrow the chances of another asset bubble emerging.

Apparently alive to this issue, the UAE economy ministry is drafting a range of new or updated laws, including statutes covering foreign investment, arbitration, auditing, industrial ownership, fraud and company law.

“These new regulations will help the country address concerns regarding commercial regulations and arbitration, and promote efficiency, transparency and investor confidence in the business sector,” says Buamim. “The main lesson is to focus on risk management.”

The role of the economy ministry and other federal bodies has become far greater in the past year, as Dubai has had to turn to the national and Abu Dhabi governments for financial bailouts. If such cooperation between the emirates can be sustained in the future, it should help the prospects for Dubai’s recovery and help to prevent another bubble emerging. For now, however, there is still too much duplication of effort with, for example, five airports and three equity markets across the UAE.

“There’s a very strong argument for greater coordination within the UAE and looking at areas where it makes sense for Dubai and Abu Dhabi to have their own capacity, and areas where it makes economic and commercial sense for them to be unified,” says Williams.

If that more sensible approach to development does emerge, it will be perhaps the biggest change of all for Dubai and its economy.