Weaving between the airport and the citys outer
limits, Dubais $7.6 billion mass-transit rail system is
like a vision from Dr Seuss. Under construction since 2005 and
80% over budget, the luxury driverless system made its
inaugural journey in early September, curling around half-built
skyscrapers and half-empty highways that a year ago were
humming with activity.
The contrast is poignant. For months, Dubai has seen little
evidence of the crippling traffic that once cost the emirate an
estimated $1.4 billion a year, and which first drove plans to
build the Gulfs first urban rail network. Hit hard by the
credit crisis, the city has seen many of its wealthier
expatriates leave in droves since 2008, many fleeing debts
racked up in the boom years. Dubai itself faces an official
government debt pile of $80 billion, the result of years of
Dubais rulers will look back on 2009 as one of the
worst in their history. It was the year that a normally tame
western press, lulled for years with stories of the
emirates successes, turned on the city state with a
savagery that evidently shocked its rulers. Cars left abandoned
in their thousands at Dubai International Airport; skyscrapers
left unfinished; investors left penniless by property scams: a
steady drip of bad news stories has done much to corrode the
public relations machine Dubai had built around itself.
Perhaps the biggest humiliation for Dubai has been having to
turn to its neighbour, oil-rich Abu Dhabi, for financial help.
A key test of the emirates solvency approaches later this
year when a $3.5 billion sukuk bond, for property developer
Nakheel, is due to mature. Financial analysts say Dubai World,
its state-owned parent, is likely to use extra bail-out cash
from the United Arab Emirates (UAE) federal government to avoid
I think there have been misgivings in Abu Dhabi for
quite some time about the scale of spending and the direction
of development in Dubai, and there is probably an element that
thinks, I told you so, says Simon Williams,
regional economist for HSBC, who is based in Dubai.
But there is also a recognition of how closely tied
together the fates of the two emirates are, and there will
almost certainly be some effort to ensure that the same pattern
does not re-emerge.
Yet for all its speculative excesses, Dubai has achieved
some remarkable feats. The light rail system is a testament to
the rapid growth of the coastal trading community into one of
Asias biggest and most vibrant cities in the past decade.
Even when it comes to public transport, Dubai has attempted to
excel. Perhaps the most luxurious urban rail system in the
world, the network will include VIP cars with fares more than
seven times the cost of the cheapest tickets.
The challenge now is to return to a more measured pace of
economic growth. I think there was a temporary sugar rush
in Dubai that came from the very rapid expansion of the
real-estate sector, and I dont expect that to reassert
itself any time soon, says Williams.
But in the process, they built the supporting
structures that will enable other sectors of the economy to
grow, and those sustainable elements, such as the service
industries, havent gone away. I still have very strong
hopes for how that will play going forward.
This optimism appears to be shared at a federal level.
Sultan Bin Saeed Al Mansouri, the UAEs minister of
economy, has predicted that the national economy will return to
positive growth as early as the fourth quarter of 2009.
The UAE has emerged from the most difficult phase of the
crisis with minimal losses, he says.
Al Mansouri highlights several positive indicators,
including an increase in consumer confidence, and a rapid drop
in inflation, which hovered at 3.4% in the first half of 2009.
Once the curse of the residents of Abu Dhabi and Dubai,
consumer prices are now the silver lining to the recession. The
IMF forecasts inflation, which soared into the high teens in
early 2008, to settle to as little as 2% by the end of the
Nowhere is this better reflected than in the property
sector. Real estate speculation was rife in Dubai in particular
a year ago, and that has been reflected in the rapid deflation
of the sector. UAE-based investment bank Shuaa Capital predicts
that, by the end of the year, house prices in Dubai could drop
by up to 60% from their mid-2008 peak. Some residents have seen
rents drop by more than a third over the same
Reliable economic data is hard to come by for the UAE,
though this state of affairs should be remedied with the
creation of the National Statistics Centre, which
contributes to supporting the digital economy of the
emirates and leverages investors trust, in the
words of Al Mansouri.
That said, the common view is that, following a mild
contraction this year, economic growth will return in 2010.
This prediction is based on two assumptions: sustained high oil
prices, which would guarantee the main source of revenue for
Abu Dhabi, and the recovery of confidence in industries such as
finance and trade, on which the likes of Dubai
According to Sultan Bin Nasser Al Suwaidi, governor of the
central bank of the UAE, oil prices will support expected
economic growth next year, after a rollercoaster period
when prices tumbled from their July 2008 peak of $147 per
barrel to less than $40, before rebounding. Al Suwaidi
forecasts an average of $6063 per barrel for 2009.
It is natural for UAE gross domestic product to decline
in view of these factors, he says.
Economists have been queuing up to pick over the entrails of
the federal economy and cast their own predictions. A report
released by Morgan Stanley in July said that the economy would
shrink by 2% in 2009, with a mild recovery predicted for next
The worst may indeed be behind us, analyst
Mohamed Jaber said in a research note. Given the recent
improvement in the global economic momentum, the rise in oil
prices over the past few months, and the general stabilization
in domestic markets, we believe that as far as the UAE is
concerned, we may have reached the bottom of this
downturn, he said.
EFG-Hermes, an investment bank, expects gross domestic
product to contract by 4% this year. HSBC is more bullish,
putting growth at 0.9%.
The IMF predicts the federal economy will contract by 0.6%,
compared with average annual growth of 8.5% during the six-year
boom. The IMF predicts non-oil sector growth to fall to just
0.8%, from 8.6% last year although it expects a positive
growth rate of 1.5% in 2010.
While growth may return, will confidence? Its high profile
abroad and reliance on foreign expatriate labour meant that
Dubai was bound to endure a drubbing following the liquidity
crunch. Acutely uncomfortable with such criticism, the UAE has
drafted a press law that would ban the publication of stories
deemed harmful to the national economy. But in many respects,
the damage is already done.
Abu Dhabi has worked hard to shore up confidence in its
neighbour, introducing a series of financial packages intended
to support Dubais debt-laden government and the broader
banking community of the UAE. Following five years of high oil
prices, Abu Dhabi has been able to build up a fiscal surplus of
$500 billion. When Dubai faltered, its neighbour was on hand to
Of the $80 billion of outstanding debt declared by Dubai,
some $7 billion is due for refinancing by the end of 2010, and
a further $25 billion the following year. The government is now
entering the second phase of a $20 billion bonds programme that
will help it provide cash to companies struggling to
Abu Dhabi was there to help with the first part of the
programme. In February, Dubai sold $10 billion bonds to the
central bank of the UAE, covering immediate liabilities, and a
further $10 billion issue is expected by the end of the year.
Whether Dubai turns to its neighbour or to the open market has
yet to be decided. But Abu Dhabis own experience with
bond issues bodes well for Dubai, should it choose the latter
Abu Dhabi in April offered $3 billion of sovereign bonds, in
two separate tranches, as part of a $10 billion programme of
debt issuance. A roadshow conducted in the US and Europe
clearly had the intended effect, as the sale reportedly
received bids worth more than double the offered amount.
Financial markets have evidently been encouraged by
Dubais determination to pick up the pieces. Dubai World
has been gauging interest from banks to restructure up to $12
billion of its loans, while determining its approach to
Nakheels sukuk. And in August it emerged that Dubai
Holding, the investment group owned by Dubais ruler
Sheikh Mohammed bin Rashid al-Maktoum, was also intending to
restructure its operations, to create four divisions covering
property, business parks, hospitality and investments.
The realities of the global economic climate
have made it necessary for us to look at our portfolio in a
different way, says Ahmad Bin Byat, chief
Dubai Holding has since moved to merge its property
interests which include DPG, Tatweer and Sama Dubai
with Emaar, the Dubai-based property group, as well as
to consolidate its two investment arms, Dubai International
Capital and Dubai Group.
Dubai government bonds have climbed steadily since the
summer, suggesting the moves have been well received. To some
extent, the emirate is also benefiting from a surge of interest
in emerging market assets worldwide, amid tentative signs of a
global economic recovery.
Focus on substance
So Dubai will likely emerge from the recession a leaner
animal, but this will be to its advantage, says Williams.
The quality and substance of infrastructure here is
excellent, and you dont see that quality anywhere else in
the region. As time passes, people will reassess their view of
Dubai and recognize those things that it has got right, and
focus on the substance of the economy, which is far more than
tall towers and palm-shaped islands.
The consequences are less positive for Abu Dhabi, which has
born the brunt of its neighbours excesses. Fitch Ratings
reaffirmed the emirates credit rating in early September,
but said its holding of Dubai debt could represent a potential
liability. Fitch also noted that while Dubai is busy reducing
its debt, Abu Dhabi has been borrowing more. State-controlled
companies have borrowed more than $18 billion so far this
I think the relationship has changed, says
Williams. On both sides of the divide there seems to be a
recognition of the benefits of a UAE federation, but also of
its weaknesses. As the economy recovers, you will see a return
of competition, and Abu Dhabi and Dubai will continue to plough
their own furrows, but I suspect you will see more central
planning and coordination than before.