16 Aug 2011
Dubai is rebuilding investors’ confidence
Dubai, a leading commercial hub in the Middle East region teetered under the weight of debt and the bursting of the real estate bubble between 2008 and 2010, is gradually regaining investor confidence. There are clear signs that Dubai is on the road to recovery in 2011.
The close relationship between “Dubai” and “Oil”
Dubai has relatively limited oil resources, which account for only 2% of the UAE’s oil reserves. However, Dubai has long been using its oil revenue to diversify the emirate’s economy, with tremendous achievement. Nowadays, Dubai’s economy no longer relies on oil exports. In 2009, Dubai only received US$1.28 billion from selling oil and gas, less than 2% of Dubai’s GDP. Meanwhile, Dubai’s main revenues are now from tourism, financial services, trade and real estate, with services constituting more than 75% of the emirate’s GDP, up from 40% in the 1980s. There is little doubt that Dubai has successfully transformed from an oil economy to a service economy.
While oil renues may no longer be a huge component of Dubai’s economy, oil remains an important influential factor. As a regional commercial hub in the Middle East, Dubai’s economy is intimately connected to the Arab economy, which has a high dependence on oil and gas (see Figure 1). For example, Saudi Arabia’s net oil export revenue amounted to more than 50% of the country’s GDP in 2010.
Dubai is slowly reviving with opportunities seen
Evidently, the Gulf region is always one of the most lucrative markets in the oil-boom years. Prior to the international financial crisis which started to besiege most developed economies in late 2008, Dubai had been a fertile market in itself and a key access point to the regional market. However, the attendant credit crunch brought down Dubai as it dealt its blow to the international financial system and global economy.
Since Dubai’s expansion was primarily driven by debt, the emirate ran into liquidity problems as foreign capital retreated from the region. The situation was aggravated by Dubai’s move to announce a debt standstill of Dubai World in 2009, which contributed to the emirate’s GDP contraction of 2.4% for that year. Dubai’s economy stabilised in 2010, as the global economy revived and credit conditions improved, reporting a GDP gain of 2.2%.
Although Dubai’s economy has been badly shaken up by its real estate bubble bursting, its leading position as a regional commercial centre remains solid. Advanced infrastructure, business-friendly policies and existing industry clusters have created long-lasting competitive advantages for Dubai as a market access point and regional management hub in the Middle East.
According to a survey conducted by the Foreign Investment Office of Dubai in 2010, most of the Middle East investors are in Dubai or planning to be in Dubai (see Figure 2).1 The survey found that 28% of the respondents believe Dubai is the top future Middle East investment destinations ahead of its major competitors, Abu Dhabi (18%), Bahrain (5%) and Qatar (3%).
Dubai’s trade and logistics sector, for example, has been a major pillar of the emirate’s economy, accounting for more than 40% of GDP. Its strong performance in 2010 provided a huge push to the recovery of Dubai’s economy, as the non-oil trade increased by 18% to AED 576 billion (around US$157 billion), close to the pre-crisis level. Dubai International Airport handled 47.2 million passengers and 2.27 million tonnes of cargo, rising 15.3% and 17.7% respectively. Despite the real estate and debt problems, Dubai’s position as a regional trade and distribution centre was unaffected.
Indeed, some investors believe this is the opportune time to tap into Dubai. First of all, the Middle East market is expected to regain momentum in light of the surge in oil prices and introduction of various government stimulus packages. Besides, operation costs in Dubai have trended down considerably given the falling rental rates and low inflation levels. Thirdly, Dubai’s economy seems to have hit bottom and cannot get any worse, as pointed out by many Dubai businessmen. Lastly and importantly, Dubai has emerged as a safe haven in the region despite the unrest that has plunged many economies into political and economic chaos in the Middle East and North African (MENA) region. Indeed, Dubai is one of the few places in the region that no protest was reported, capturing investment, capital and tourists from neighbouring countries, many of which have suffered from the MENA unrest.
Looking forward to the future
According to Mr. Hamad Bu Amim, director general at the Dubai Chamber of Commerce and Industry, Dubai’ can expect GDP growth of 3%-5% in 2011. In the longer term, Dubai’s economic outlook remains promising. Major sectors, such as trade, logistics and tourism, show strong performances. Recovery hopes on the real estate market and banking sector are brightening in view of the substantial improvement of investor confidence. For example, Dubai’s credit default swap (CDS), previously well exceeding 1,000 basis points in the wake of the debt standstill announcement in late 2009, came down to about 450 basis points in January 2011 and further to around 350 basis points in June 2011.
The Dubai government’s determination to solve its debt issue has helped raise investor confidence. In recent months, the government has been proactively negotiating with creditors on debt repayment schedules of Dubai World. Moreover, the government has been more careful on capital allocation. It reviewed projects in the emirate, cancelling more than 200 projects to ensure sufficient capital is allocated to projects that are prioritised. It aligns with our interviewees’ observation that more than 50% of the construction projects in Dubai have either been cancelled or put on hold. These are good signs for the recovery of the emirate’s economy.
Given the huge decline of property prices, a further downslide of Dubai’s real estate market is very unlikely to happen. Indeed, the industry expects that more projects will be restarted in the second half of 2011. For example, Nakheel properties, Dubai’s state-owned property developer giant renowned for the Palm Island projects, has continued to restart projects since the last quarter of 2010. However, the industry also notes that the over-supply situation in Dubai’s real estate market will not disappear in a year or so, and it may take some time for it to be fully absorbed.
Although international investors are showing a warming interest in the new debt issues of Dubai, the overall debt condition of Dubai will remain a long-term issue worth paying attention to. According to an IMF report released in May 2011, Dubai’s gross government debt-to-GDP ratio is only 33%, which is low by the standards of developed countries like the US, UK and Germany, whose debt-to-GDP ratios are in a range of 80%-90%, while that of Japan surpasses 200%. However, should the debt of Dubai’s GREs be included, the ratio would be higher than 100% (see Figure 3).
Certainly, Dubai is gradually rebuilding investor confidence while attempting to tackle its debt problem proactively and pragmatically. With advanced unrivalled infrastructure and a more sophisticated services sector, Dubai’s competitive advantage as a regional commercial hub will be strengthened in the longer term, with the recent MENA unrest merely highlighting the value of a regional safe haven.
1 Commissioned by the Foreign Investment Office of Dubai’s Department of Economic Development, the survey was released in 2010. The respondents were senior executives of the world’s leading corporations, spanning 44 countries and 17 industry sectors. Together, the respondent companies comprised more than US$2 trillion in annual global sales.