Dubai stays on comeback trail as government steps take hold

Dubai: Dubai is a ‘fine' city. It fines commuters for traffic rule violations. "Now it has been fined for over-speeding" — that's how some people describe the emirate's current economic situation.

Others say it's the ‘wear and tear factor' that has slowed down Dubai's long and high-speed journey for a while. After the repairs, it will take off smoothly.

However, Hamad Bu Amim, Director-General of the Dubai Chamber of Commerce and Industry, puts it slightly differently.

"We suddenly stopped at a very high speed. It was as if someone had pulled the handbrake of a vehicle at high speed," he said.

"Local financial institutions were lending heavily to the real estate market around the world including Dubai, with money borrowed from the interbank market and from international financial institutions through heavy leveraging — most of whom had by then already begun to feel the crisis emanating from the US sub-prime mortgage market collapse.

"However, from September 2008 after the collapse of Lehman Brothers, most of them have either abruptly stopped lending or begun withdrawing funds. They just stopped."

Expert handling

Luckily, the car did not overturn because of the expert handling of the sudden halt and its aftershock.

"The government has managed to steer the economy from crisis by timely and necessary intervention," he said.

"The economy began to stabilise since February 2009 and we can see some positive movements in certain sectors of the economy."

High public spending and exceptional anti-crisis financial measures have not only cushioned oil exporters' own economies but are also contributing to sustaining global demand, says Masoud Ahmad, IMF director for the Middle East and Central Asia Department, in his latest article.

"Between 2004 and 2008, Middle East oil-exporting countries grew by about 6 per cent a year and accumulated $1.3 trillion [Dh4.78 trillion] in foreign assets," he said.

"With the striking drop in oil prices — from a peak of $147 per barrel in mid-2008 to around $30 per barrel at the beginning of 2009 — the countries of the Gulf Cooperation Council [GCC] have been hardest hit. Iraq and Saudi Arabia are expected to see the most pronounced drops in oil GDP [gross domestic product] growth — 12 and 15 percentage points, respectively — this year."

In response to the crisis, the UAE federal government then injected Dh120 billion through the Central Bank and Ministry of Finance, which helped the banking sector to weather the storm.

"Many people thought that the amount was inadequate — might not be enough," Bu Amim said.

"But after a year, I think the amount was just right."

Globalised economy

"The crisis showed how globalised the economy has been all over the world," Bu Amim said. "It also shows the openness of our economy. Dubai has become part of the global economy. Thus, it became affected."

During the pre-crisis boom years, banks had lent substantial amounts for real estate and equity purchases and made large profits.

Ahmad says, "With the onset of the crisis, asset values fell sharply and the global deleveraging led to a severe tightening of credit conditions, especially in the GCC as banks' balance sheets have come under pressure credit growth has slowed sharply — up to 40 percentage points in Qatar.

Governments have also directly injected capital into stressed financial institutions and central banks have provided liquidity support to stabilise financial systems.

"Now — that is, during this downturn — the foreign assets accumulated during the boom years are being used for countercyclical fiscal spending. Witness Saudi Arabia, which announced the largest fiscal stimulus package [as a share of GDP] among the G20 [Group of 20] for 2009-10, and a $400 billion investment plan over five years," Ahmad says.

"These anti-crisis measures have taken the sting out of the impact of the crisis. The non-oil sector is now projected to grow by 3.2 per cent in 2009."

The worst is over

However, the worst is over, Bu Amim says.

"We are witnessing slight growth in some areas. For example, the number of Certificates of Origin, which reflects the export volume originate from an economy [country, state or emirate] has increased to 50,000 per month, from 45,000 in February this year," he said.

"Our membership went down to 100,000 earlier this year from 110,000 last year. However, the membership size currently stands at 106,000 — which reflects that businesses are coming back."

Membership of the Chamber is mandatory for all companies registered in Dubai.

He said, however, the recovery will be slow.

Inflation and costs

A steep decline in property prices and rents has almost flattened inflation.

"With oil price trading at $70 to $80, we see the economy balancing out with government spending spurring consumption and growth," he said.

"This will definitely help the economy balance out and stabilise. No one wants to go to the high inflation environment witnessed in 2007-08. Oil price of $70-$75 is good for all.

"With property prices remaining relatively low, economic growth and inflation remains flat this year," Bu Amim believes.

A year after the crunch

As the dust settles, most businesses are reassessing their strategy in line with the current market situation. However, whether the economy has bottomed out or will decline further, remains the billion-dollar question. While some sectors seem to be recovering, others are not.

"The recovery is happening slowly in some sectors. However, it will take some time in the property and construction sectors," he said.

The banking systems have so far absorbed the stress and banks have remained solvent and profitable, although at a lower level. Deposit growth and capital inflows are beginning to regain strength, yet private sector credit has remained sluggish: instead, banks are opting to build up reserves in the central bank, Ahmad says.

"One way to dampen the cyclicality of bank borrowing and lending would be to introduce dynamic loan loss provisioning — that is, to build up cushions during good times to be used during bad times. While this may cut into banks' profits, it could ensure continued lending during economic slumps and reduce the ultimate fiscal cost when tail risks materialise," he says.

Strengthening the mortgage market could help kickstart the real estate sector, which is hungry for cash. About 27,000 new housing supplies at rock bottom prices could lure investors into the market, provided mortgage is made available.

"Liquidity injection in the mortgage sector could jump-start the real estate sector. The government should look into ways to pump liquidity into the major developers that will help the industry to recover faster," Bu Amim says.

However, Ahmad feels there may be value in developing alternatives to bank financing. "Such as local private debt markets. This would allow banks to concentrate more on financing small and medium-size enterprises that create private sector jobs and help diversify economies," Ahmad says.