Is Dubai Back? – Zawya

Posted on May 3, 2011 by


Dubai’s economy seems to be gaining momentum once again. But is it a temporary bump due to unrest in other parts of the Middle East or is the recovery on sounder footing? And, can Dubai be great again?

Dubai’s economy, which was once the envy of its regional rivals, has struggled since the global financial crisis. But there are many indicators that suggest the emirate’s economy has turned a corner.

While some critics may think Dubai has benefited from a ‘flight to quality’ as funds, tourists and business opportunities fled from Bahrain and Egypt to Dubai, the resugrence seems to be on sounder footing.

There are still many issues to contend with before this bump can transform into a full-blown recovery. The real estate sector and the country’s debt obligation are issues that will be an overhang on the economy, but the country’s unparalleled infrastructure, communciations and transportation, and all-round high quality of living could ensure that the emirate has gotten has gotten ‘over the hump’ and is on its way to recovery. But expect a few nasty surprises along the way, especially if some of the government-related enterprises (GRE) default or the Middle East’s troubles escalate.

Dubai spin doctors have made a career out of telling the world how regional troubles are beneficial for Dubai. Gulf War 1? Think of how Dubai will be the logistics hub. Iraq War? Dubai will be the hub for Iraq-focused companies. Trouble in Iran/Afghanistan/Pakistan/Lebanon? Think of the money that will flow into safe -haven Dubai.

This argument, however, wore thin over the past few years after Dubai saw its economy battered in the aftermath of the global financial crisis. Suddenly, its business model seemed full of holes, its most ambitious company Nakheel, became its biggest embarassment and the real estate went kaput. The spin doctors themselves lost their jobs.

 But the Arab Spring is blowing favourable winds Dubai’s way again.

“Dubai, as the region’s safe haven, is benefiting from a flight to quality. This applies to tourism and retail, as well as the financial sector,” says Standard Chartered bank, which thinks Dubai will be one of the “winners” of Middle East turmoil.

The Dubai economy seems to have turned a corner and analysts who have been watching Dubai for years have observed that positive news coming out fo the emirate outnumbered bad news in the first quarter of the year. That is a huge change from the spate of bad news from Nakheel, Dubai Worldand the wider real estate, tourism, retail and financial market meltdown that had characterised the emirate’s economic fortunes over the past few years.


One Dubai entity that encapsulates all these above mentioned sectors is Dubai Holding Commercial Operating Group (DHCOG), or more simply Dubai Holding. With interests in real estate, tourism and telecom, the conglomerate is a key pillar of the Dubai Government’s economic infrastructure, the entity serves as a great barometre for the Dubai economy and is part of the so-called Dubai Inc.

Dubai Holding’s revenues increased 43% to AED13.5Bn in 2010, up from AED 9.4Bn in 2009, which it credits to “the handover of completed projects in the built-to-sell portfolio of Dubai Properties Group in communities such as Business Bay, and Dubailand,” apart from growth in telecom and hospitality.

Jumeirah Hotel, which runs Burj Al Arab and Emirates Towers, also saw net profit rise 58%, while operating profits increased by 30%.
“Led by forecasted steady GDP growth rate, global rebound in trade driven by the eastern markets, a strong oil price and stability of the country, we expect to see all our lines of business perform steadily,” said Dubai Holding , which is a vital government-related enterprise, or GRE.

More importantly, it has assured the market it will repay its upcoming bond on maturity, has refinanced a $555 million loan and continues to reduce exposure to non-core assets.

Analysts were watching Dubai Holding closely especially after Dubai World– the emirate’s other major conglomerate – had announced its troubles in late 2008 and defaulted.

DHCOGwas a big worry. After Dubai World, people have been concerned about their debt pile,” Mohammed Ali Yasin, chief investment officer at CAPM Investments in Abu Dhabi, told Reuters. “The fact they were able to refinance their loans and are confident of repaying the bonds supports the fact that a recovery is slowly coming back to Dubai.”

DHCOG has a 250 million Swiss franc-denominated bond due in 2011, and a $500 million bond due next year.

The bailout of the GREs helped push up Dubai’s sovereign debt by almost 20 percent of GDP in 2009, demonstrating the fiscal risks posed by GREs, the IMF states. “Although Dubai regained market access in September 2010, the cost remains elevated, reflecting contingent liabilities from other GREs; rollover needs of $31 billion in 2011-12; and broader concerns about the solvency of restructured GREs if asset values do not recover to enable repayment of the restructured loans at maturity.”

These uncertainties are likely to persist even as the Dubai government develops a strategy to put its GREs on a viable path as refinancing problems could re-emerge when the restructured loans mature after 2014, including those from local banks, warns the IMF.

Other parts of the economy also suggest that Dubai is gaining traction. Dubai Airports said its March passenger traffic rose 5.8% year-on-year, making it the fourth busiest airport in the world, although freight volumes fell 3.7%

During the first quarter of 2011, 12.3 million passengers passed through the airport, up 7% from 11.5 million during the first three months of 2010.

“Dubai’s hospitality sector is also performing well, with China emerging as a key market. Airport traffic, a key indicator of visitor levels to the emirate, rose 15% in 2010,” says Standard Chartered Bank.

Tourist reservations for the first nine months of 2010 rose 16% year-on-year to 7-million people. “Tensions in other tourist destinations in the region could also indirectly benefit Dubai’s tourism sector. This is especially the case for intra-regional tourism. Indeed, tourist arrivals from Saudi Arabia rose in January and February 2011, a time of high risk in other parts of the region (this period also coincided with a long public holiday in Saudi Arabia),” the bank said.

Analysts also think that Dubai has also benefitted from the Egypt tourism sector coming to a virtual standstill, as tourism traffic and expatriates and residents fleeing the North African country buoyed Dubai’s tourism sector.

More importantly, the emirate has been paying its bills, which has brought confidence back into the economy. In late March, Emirates airline, another GRE, said it has repaid a US$500 million bond in full on its maturity date and is on track for another record breaking financial year.

“The results for the first half of the 2010-11 financial year are incredibly robust, and reflect Emirates’ success in growing customer demand, supported by investment in new aircraft, products and customer service,” said chairman Sheikh Ahmed bin Saeed Al Maktoum.

Still, as the table below shows, the economy still has some way to go before a full recovery and has significant debt obligations till at least 2020.

A key worry is Dubai Group, which is DHCOG‘s investment arm, but ring-fenced from the rest of the company.

The entity, which has stakes in EFG-Hermes, Taib Bank and Bank Muscat, is currently in discussions with lenders over a $10-billion restructuring, with a resolution expected to be some time away.

Dubai Group To Restructure $10B Debt, Talks May Drag – Sources

Citibank estimates that the emirate’s economy grew 3.6% 2010, and is forecast to rise 5% in 2011, jumping to 6% in 2012.

“The UAE may be a net beneficiary of the political turmoil experienced in other parts of the Middle East,” notes Citibank.Due to its relative political stability, we believe there is a possibility of a diversion of commercial, investor and tourist activity from less stable parts of the region. The external sector thus is the main driver of the recovery, with gains being posted both in export growth, and a reduction in imports. Dubai’s economy, in particular, is showing signs of strong externalled recovery as sectors such as tourism, trade, logistics and transportation respond strongly to the rebound in the global economy and may get a boost from the political instability in regional competitors.”

The IMF has a more conservative forecast and expects the UAE economy to rise 3.3% in 2011 and 3.9% in 2012, which is below regional growth.

“Dubai’s economy is recovering,” says Standard Chartered Bank in a note to clients. “The recovery is based on three pillars: logistics, hospitality and retail. It is also important to highlight that Dubai is seen as the safe haven of the region. Given elevated risks elsewhere, Dubai is benefiting from a flight to quality. This benefits the hospitality and financial sectors. The uncertain situation in Bahrain, which has a banking sector 10 times the size of its economy, could end up benefiting Dubai’s financial centre. There are already signs that funds and companies are fleeing to Dubai from Bahrain.”

Logistics and trade, which makes up 40% of the emirate’s GDP, rose 19% year-on-year in the first ten months of the year. Direct exports rose 36% year-on-year to $15.3-billion, and imports gained 14% to $81.7-billion. Re-exports grew by 22%, reaching $32-billion.

“This pick-up in trade was a significant contributor to economic activity, and it is likely to continue – the government forecasts that non-oil exports may grow 20% in 2011,” says the bank. Tapping new trade opportunities with Africa will help Dubai to maintain its status as a regional trade hub, especially given strengthening trade links between Asia, Africa, the Middle East and Latin America.


Even the UAE stock markets, which have been anaemic and lethargic for the past few years have come back to life.

The table above shows that the Dubai Financial market has a long way to go to retrace its 2008 highs, but that’s exactly what makes it attractive.

“The UAE stock markets are some of the cheapest globally, with the economy hit by debt issues in Dubai and a real estate market under pressure,” notes Rasmala in a note, recommending investing in the UAE stock market.

Dubai risk is coming down (although it still exists) and the Dubai CDS spread has come down from 455bp at the beginning of March to 370bp currently, “suggesting to us the discount rate could come down by up to 1%, thus supporting higher valuations.”

Middle East Sovereign Debtors Seen As Among Riskiest By Global Investors

An MSCI upgrade to emerging market status in June could be a major boost for the UAE’s international reputation, as it will help make the stock markets more attractive to institutional investors, lift trading volumes and lower investors’ risk perception of the exchanges, notes Rasmala.


Anyone who has spent time in Dubai will know that the emirate will not be content with a meandering growth. So the bigger question is: can Dubai – the great Arab experiment of government-controlled capitalism – be great again?

There are plenty of issues to contend with before Dubai can retain its buzz of 2002-08.

The biggest drag on the emirate’s economy remains its real estate, which continues to be in considerable pain since 2008.

We believe UAE house prices are likely to decline by an additional 25-30% (nominal terms) after a peak-to-date 45-55% drop largely due to the ‘3D’ challenge of depopulation, deleveraging and deliveries, says Rasmala.

“We believe equity valuations largely account for systemic challenges, but in the absence of significant catalysts – including consolidation, privatisation, banking and immigration reforms – we expect the UAE property sector to remain range-bound in the foreseeable future.

The emirate currently has an oversupply of 105,000, according to Al Mal Capital. “Prices and occupancy levels are likely to continue declining until 2013. We expect average prices in Dubai to fall by a further 5% and 4% in 2011 and 2012, respectively. Prices are expected to continue decline in 2013 and bottom-out by the end of 2013.”

Closely linked to the fate of real estate and Dubai’s greater debt issues is the emirate’s local banking sector, which has suffered over the past few years. “We expected a clean-up of the balance sheet in late 2010, and this has been delayed,” says Rasmala. “Nevertheless, a resolution of the big issues – Dubai-related GREs – by 3Q11 looks realistic.”

At the same time, the banking sector has been addressing the issue of its liquidity shortage gradually, with the banking sector as a whole moving into liquidity surplus around the year end. Now, the banks are beginning to ease liquidity constraints, and are moving back to making progress on lending, but Rasmala says lending to the private sector remains limited.

Also read: Dubai Leads List Of World’s Worst Housing Markets

Dubai’s main challenge is leverage, especially given significant maturities in 2011 and 2012. But there are two positives this year compared with 2010 and 2009 argues Standard Chartered.

“First, the housing-market bubble has already burst; growth has turned positive and is gaining momentum. Even if growth remained within the 3-4% range, far below the rate during Dubai’s boom, it is positive and broad-based.”

Second, the uncertainty surrounding restructuring has been reduced, as a plan is now in place. “These are positive developments, but Dubai still faces significant maturities of around $18 billion in 2011, says Standard Chartered.

Most of these are related to loans rather than bonds. This will probably reduce market concerns, but any rollovers or restructuring of bank loans would likely keep credit conditions tight across the UAE, detracting from growth dynamics, the bank notes.

Dubai can also take comfort from is sister emirate Abu Dhabi which has been raking in petrodollars, thanks to high oil prices. Any shortfall or risk that Dubai economy may well see Abu Dhabi intervening once again to bail out the emirate, just like it did in 2009 with a $10-billion loan. We fully expect Abu Dhabi Government to intervene once again and ensure Dubai’s financial needs are met.

Abu Dhabi is an oasis in a troubled desert

This belief is further strengthened as the Abu Dhabi Government will be keen to avoid any public backlash that has derailed the economies of other Middle East nations. Indeed, the UAE (read Abu Dhabi) has participated in a $20-billion GCC development fund for its neighbours Oman and Bahrain, and it is reasonable to expect Abu Dhabi will not leave Dubai in the lurch either.

We also expect that some of the $100-billion plus spending announced by Saudi Arabia government to spill over into the Dubai economy.

A recent Saudi Banque Fransi notes that the Saudi economy has already felt the positive impact of the government’s massive pay rises and payouts to its citizens.

Government bonus payout has spurred 13.8% jump in annual money supply and 13.3% rise in deposits in March, while consumer indicators point to rise in private consumption, and point-of-sale transactions jump 22.6% and cheques surge 29% from February levels, says Banque Saudi Fransi.

We expect many Dubai companies, or companies based in Dubai but focused on Saudi Arabia, to benefit from this major investment spree that will be rolled out over the next few years.

Saudi Arabia’s Boom Is Here To Stay

Bahrain’s troubles also give Dubai’s financial sector some momentum especially as Manama’s reputation has greatly suffered over the past few months.

However, one key cloud hovering in the distance is the Iranian-GCC confrontation and a proxy war that is playing out in Bahrain. Any escalation of that conflict could hurt investor sentiment and delay economic recovery even in safe-haven UAE.


Dubai has historically benefited from misfortunes in other countries in the region. “It seems this year has not been different, and the current unrest sweeping around the region provides Dubai with a period of opportunity,” says Rasmala. “But as we see this as a short term phenomenon; there will be a need for political stability and investor confidence in the region to make this sustainable for the longer term.”

While challenges remain, believes the Dubai economy is on a much sounder footing especially as much of the excesses and speculative elements of the economy have been weeded out. What Dubai is now left with is an unparalleled logistics, commercial, retail, communications and transportation infrastructure in the region – and ready for business in a region that is sitting in a fresh pile of cash thanks to high oil prices. $1-Trillion Of Oil Revenues May Be Looking To Buy Assets Next Year: MS
Seems like the stars are aligning for Dubai once again.

Posted in: Middle East