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The most vibrant of the seven emirates in the United Arab Emirates (UAE), Dubai, has been pushing forward quickly with its ambitious plans to diversify its economy and make itself the business hub of the Gulf region. Though this process continued throughout 2008 and will be carried forward into the new-year, the breakneck pace of Dubai's economy is expected to slow as the effects of the global crisis are becoming evident.
As 2008 comes to an end, growth rates are being revised downwards from the 11% predicted early in the year to around 7%, well below the average of 17.9% achieved between 2000 and 2006, according to the Dubai Chamber of Commerce and Industry.
Despite the forecast deceleration, Dubai remains one of the world's fastest growing economies. Unlike some of its neighbours, the city-state is less likely to be directly affected by slumping oil prices as the oil sector's contribution to Dubai's GDP has fallen to just 5% in 2007 and is expected to further drop to 4% this year, according to official budget projections issued in January.
However, reduced energy earnings means there will be less cash floating around for investments, a factor that could affect Dubai's high-flying real estate market.
According to a report issued by EFG-Hermes on November 30, residential prices have shown signs of weakness in the second half of the year, versus the first half of the year. The drop in prices has however been matched by an increase in rents over the same period, largely due to weaker appetite for property property purchases, but also due to strong demand stemming from new entrants to Dubai. "Interestingly, new units released to the market have experienced a faster pickup in occupancy rates in recent months, illustrating this shift towards the rental market vis-à-vis a buyers market," the report stated.
Tighter credit conditions and a series of measures designed to deflate the property-price bubble played their part. The most important was a limit on off-plan sales, as well as the proposal under which foreigners who buy residential units would no longer be guaranteed residency permits. As a result, it could be argued that the property sector cool down has been induced by painful but necessary economic reforms.
Dubai's stock exchange also had a volatile year, hitting a record high of 6,291.87 points on January 15 and then dropping to below 1,950 points in early December, having shed more than 60% as investors grew more nervous of an increasingly gloomy real estate outlook.
But even as pressure mounts, many see new opportunities in the correction.
"The positives about Dubai are its flexibility to change and meet new challenges and its preparedness to adapt to the market which will hopefully be its strength and see it through," Edward Newitt, partner at Holman Fenwick Willan, told OBG in late December. He went on to say that the government had done a good job of selling Dubai over the years, and now also had "to sell the financial viability of Dubai with the same gusto".
Though some concerns have been raised over the high debt levels carried by Dubai, especially due to the loan funding for the emirate's huge infrastructure programmes, both local officials and those from the federal UAE government have made it clear there is no risk of any public organisations defaulting on their debts.
In mid-October, Moody's credit ratings agency issued a warning that Dubai's high debt levels, which it estimated at 100% of GDP, had made the emirate vulnerable to an economic slowdown.
However, in late November, Mohammed Alabbar, the chairman of a committee set up by the Dubai government to advise on measures to combat the economic downturn said that while the emirate's sovereign debt stood at some $70bn, it had assets of more than $260bn.
"The government can and will meet its obligations going forward. Let there be no doubt about this fact. We accept the challenges that face us and we will rise to them," he told a press conference on November 24.
The government did take prompt action in late November when it stepped in to shore up confidence in Dubai's troubled mortgage sector, announcing the merger of its two largest home loan lenders, Amlak Finance and Tamweel, after share prices for both firms dropped by more than 80%, and the forming of a new lending giant. Though news of the federal intervention came as somewhat of a surprise, the move will serve as a guarantee that Dubai's economy will not be allowed to falter.
Dubai's banks too have been given protection. The Moody's alert coincided with the announcement by the UAE government that it would guarantee all bank deposits and provide $13.6bn to increase liquidity in the credit market.
Investment by the emirate could also be its deliverance. Dubai has embarked on vast infrastructure expansion in transport capacity during the year to consolidate its position as the region's aviation hub. Along with the continued development of the Al Maktoum International Airport, part of a $120bn project to make the emirate a centre of air travel and aviation services, Dubai firms placed some of the world's biggest orders for new aircraft in 2008.
Dubai Aerospace Enterprise Capital, the leasing and financing arm of state-owned Dubai Aerospace Enterprise (DAE), placed an order to buy 100 Airbus aircraft in a deal worth $13bn in July. Meanwhile, in the same month, new low cost carrier FlyDubai, which is scheduled to take to the skies next year, placed orders worth more than $3.74bn with manufacturer Boeing for 50 Next-Generation 737-800s.
There are more than a few silver linings though for Dubai as 2008 closes, one of which is the predicted fall in inflation. On November 21, UAE Economy Minister Sultan bin Saeed AlMansouri told local media year-end inflation would moderate to around 10% this year from the 11.1% in 2007, while an International Monetary Fund (IMF) report issued in late October said inflation across the UAE would end the year at 12.9% before falling to 10.8% in 2009. These predictions were however made before the effects of the marked slowdown in demand seen in the last two months of 2008.
Though Dubai has not posted the characteristic exponential growth of past years, it remains one of the world's fastest growing economies. Besides, the state's extensive spending on infrastructure projects, as well as the large scale investments already made to establish the emirate as a global business and trading hub, mean that when the regional and international economy starts to come out of its slump, Dubai will be ready to take the lead.
