It comes as no surprise to hear of the IMF warning that the UAE could be hit by further deterioration in the eurozone crisis. Their report specifically highlighted Greece as the major source of “contagion risk” for Dubai and added that Italy, Portugal and Spain could also add to the emirate’s woes.
The Spanish Prime Minister, Mariano Rajoy, has finally realised that his country needed to be bailed out to try and save its exposed banking system which has been saddled with at least US$ 240 billion in dicey real estate loans. Whether the requested US$ 125 billion is enough remains to be seen and I guess a stronger firewall – maybe ten times this amount – will be needed to stop the crisis spreading to other countries. But what should be clear to the authorities is that if this bail-out fails, it will lead to a global economic catastrophe. However, as the less than proactive eurocrats have done very little since the euro crisis started in Greece over two years ago, the outlook is indeed bleak.
It does seem ironic that as Dubai recovers from the GFC and has metaphorically taken its medicine over the past three years, it now may be forced to take another dose because of the failure of other countries to look after their own economic health.
As business confidence plummets around the world, the annual IATA meeting in Beijing spreads even more doom and gloom. The industry has been hit by a triple whammy of high fuel prices, Europe’s sovereign debt crisis and the political situation in the Middle East. This has seen its profits fall from US$ 16 billion in 2010 to US$ 8 billion last year with their current year forecast of US$ 3 billion – a wafer thin 0.5% net profit margin.
Whilst the air industry was meeting in its capital, the Chinese government surprised the markets by cutting interest rates by 25 basis points – its first cut since 2008! Although perhaps a sign of easing of monetary policy, it did little for the equity markets amid fears that it would fail to boost lending as their mainland banks continue to struggle to fill loan quotas.
As reports indicate that the Dubai bourse has lost in excess of US$ 60 billion since the September 2008 failure of Lehman Brothers, the Dubai Financial Market Index again remained flat starting and ending the week at exactly the same level – 1464.
Dubai-based expats will be relieved to discover that the emirate has slipped to become the 94th most expensive city in the world – down 13 places from last year. At the same time, Dubai continues to live up to its reputation as a global tourist destination, now ranked 8th in the world. It seems that it is by far the most popular of the total top ten destination cities in the Middle East and Africa; its 8.8 million visitors account for 30% of the top ten’s total of 29 million.
As part of its strategy to increase the number of visitors to Dubai, authorities are now pitching for the city to host the 2020 World Expo. It will be bidding against four other locations – Ayutthaya, Ekatrinburg, Izmir and Sao Paulo.
One of Dubai’s traditional industries – fishing – received a boost this week with the announcement of the second phase of the emirate’s Al Hamriya port development. This will include a new 1,650 metre long wharf with a capacity to accommodate 200 fishing vessels.
As Dubai’s property market sees welcome strengthening in specific areas, there was news of a further 2,000 apartments being released this month. Comprising eleven buildings, the Ritaj development is situated in Dubai Investments Park and may prove a magnet for those residents currently working in neighbouring Abu Dhabi. Although the economy is showing major signs of improvement, with investor confidence heading north, it is sobering to remember that current property prices are still 64% lower than at their peak of September 2008.
Despite the fact that there are positive factors indicating an upsurge in the local economy, it is the external factors that will cause future problems. In the short-term, this week-end’s Greek elections or any further worsening of the situation in Spain maybe the catalysts for a major spill over from the current fringe players into the heart of Europe and then into the rest of the world.
Most of Europe is in a perilous state and if Greece has to return to the drachma, Europe will inevitably go into a deep recession with the knock on effect for Dubai – further tightening of liquidity, increased lending rates and a massive body blow to the three “Ts” that have led Dubai’s economic revival, tourism, travel and trade. And what will happen to say the American and Chinese economies – both of which will be major casualties of a European economic meltdown? No wonder there are those who look at the immediate future and paint it black.