Everybody is worried. As conditions continue to remain challenging, the discounting model that has been put across industries in Dubai has meant an erosion in margins.
And even as business activity has picked up, prospects of higher profitability — and therefore higher asset valuations — continue to elude us. This, despite the fact that the stock market is up 12 per cent on a year-to-date basis and real estate prices in certain ready communities are starting to inch higher.
I am no economist, but despite the commentary, have the following observations to point out:
■ The ongoing trade wars are bad for everyone, but it looks like they may be coming to be an inflection point. The reason is simple: free trade has been good for human rights throughout the world. That is the empirical observation throughout the last two decades.
The current attempt at reversal has done more to change the supply chains rather than actually reduce the flows of trade. However, we are reaching the outer limits of that outcome. Any further escalation and it is likely that consumers will have to bear the brunt of increased tariffs.
This inflationary phenomenon will be something that the US administration will be keen to avoid.
■ When a trade war gathers momentum, the rush is for capital to move towards the dominant economy. This is what has happened with the dollar. However, with the passage of time, currency strength becomes deflationary, which is toxic.
In the rest of the developed world, we already have negative interest rates. This will be a scenario that the US will try to avoid, and markets, anticipating that, will start to move away from the dollar and into other currencies. The weakening of the dollar will help dollar-pegged economies as pricing power starts to return.
■ Restricting immigration, which is what the US is doing, is an inherently populist move, and one that will backfire as other countries increase their efforts to attract global talent. We have already seen such moves in the UAE, and there are more liberalisation reforms on the horizon, as efforts to open up the economy accelerate.
■ We are likely to see further US rate cuts at the short end of the spectrum, as the US Federal Reserve starts to move against slower growth rates. This will add further impetus to a weakening dollar, as well as lower the cost of money, adding to upward pressure on prices at the asset level.
■ Lastly, it is likely that rate cuts will not be enough, and that the Fed will be forced to resume their programme of quantitative easing. It is clear that there is too much debt in the world economy, and the only way out of this, is to reduce the cost of debt. This growing realisation will reverberate throughout asset markets as keeping liquid assets will not generate enough returns.
The above narrative implies a greater growth trajectory for the UAE economy, as we move towards the pivotal Expo event. There has been enough scepticism expressed about the lack of stimulus that has been generated thus far regarding this event.
However, it fails to take into account the headwinds that have been at play since the bid was won. On the currency front alone, the strengthening dollar has meant that asset prices have become more expensive in other currencies (even as their domestic prices have fallen), which has forced developers to tap into new markets.
A reduction in fees and other stimulus measures have meant that there has been a general increase in efficiency of the economy. This combined with legislative and regulatory reforms have meant that there remains momentum in new industries such as fintech and e-commerce.
The broader narrative, however, remains on the macro front, and the gradual unwinding of the trade wars will be the “tent pole” event that will stoke the fires of growth as we head towards 2020.
Nasser Malalla Ghanem is Senior Partner at the law firm of NM Associates, which has a joint venture with GCP.