From crisis to recovery: Vital reforms have been put in place to stabilise the economy

The last decades of rapid economic growth in Dubai are a well-known phenomenon. Equally well known are the economic shocks the emirate witnessed in wake of the global financial crisis. The mood in Dubai, however, is swinging back towards a more guarded optimism as it regains its status among regional and international economies. Dubai is still exposed to developments in global financial markets, but the federal government and Dubai’s authorities have taken concrete steps towards stabilising the economy and restoring investor confidence.

THE NUMBERS: The UAE’s GDP grew from $187bn in 2005 to just under $360bn in 2011, according to the IMF. GDP per capita that year was $45,653. In 2012 GDP was expected to reach $386bn, and the IMF estimates that GDP will continue growing, reaching $450bn in 2017. Dubai’s government revenue mainly comes from non-oil revenues in the form of fees paid for government services, with tax revenue only accounting for about 17% of income (see analysis). Dubai’s free zones form a major commercial hub, especially for re-exports to the greater Middle East and Africa region. Finally, tourism, real estate and heavy manufacturing are also sectors that make major contributions to national GDP.

RECOVERY: Some creditors that had funded Dubai’s rapid development were caught off guard by the global economic downturn and the government’s subsequent request for relief on all debt repayments by its related entities. When the first waves of economic shock hit, many projects were using short-term loans to cover long-term developments. Specific figures vary, but estimates suggest Dubai firms borrowed over $80bn in the years prior to the crisis to finance development.

Despite the enormous financial and social impact of the credit crisis, it is widely seen as having been a catalyst for important sector reforms that will help sustain economic growth in the future. Local authorities mobilised in response to the economic downturn with a variety of measures, including debt restructuring, a process of fiscal reforms to increase oversight of financing practices and efforts to narrow the deficit by reining in spending. Several key infrastructure projects are still being funded, but spending is on a far more modest scale. The government also created the Higher Fiscal Committee to oversee negotiations with creditors to restructure debt and help push reforms for government-related entities. Fellow emirate Abu Dhabi also stepped in and added critical support by providing funds to help Nakheel, Dubai World’s property and real estate investment arm, avoid default in 2009.

In 2012 subsidiaries of Dubai World, Dubai Holding and Dubai International Financial Centre (DIFC) had an estimated $24bn due in scheduled debt repayments. The firms were able to restructure their debt and issue bonds to cover the loans. Both bonds were oversubscribed, indicating that the market still considers the emirate a good investment. Nevertheless, Dubai entities will have about $50bn in liabilities to meet between 2014 and 2016, according to a November 2012 note by Standard Chartered, a creditor to Dubai. Although rebounds in several sectors are expected to help meet the emirate’s debt obligations, no major sales or plans have yet been made to arrange for these repayments.

UNCERTAINTY: The events following the debt crisis revealed, among other issues, the lack of reliable data in the emirate. This created much uncertainty as investors tried to gain a clearer picture of the economic situation. It also made it more difficult for authorities to regulate the private sector and develop appropriate policies. The government has acknowledged this situation, and has taken a variety of measures to help better target and prioritise investments. These efforts build on the work of the Dubai Statistics Centre, which was established in 2006 to provide reliable data to inform policy and public sector investment decisions in the emirate.

Most current indicators suggest that Dubai has weathered the worst of the crisis and is gradually resuming its position as a leading financial and commercial centre in the GCC. GDP continues to grow, albeit at a slower rate. There is also evidence that businesses are investing in the emirate again.

Data released under the 2013 budget show that the government expects fees paid to establish businesses and conduct trade through Dubai will add up to around Dh20.22bn ($5.5bn), or 62%, of total government revenues. This represents an increase of almost 10% from 2012, even though the government is following a policy of not increasing fees for services. This therefore indicates that businesses are applying for more licences and paying for more government services (see analysis).

PICKING UP SPEED: In the wake of the market dip, the real estate sector is under some stress due in part to a glut of supply compounded by falling prices. While several major projects were cancelled or postponed, some market segments seem to have bottomed out and are now showing signs of recovery (see Real Estate chapter). The economy is again growing, albeit at a slower rate. In line with realistic expectations, the government recently reduced overall growth projections from the 11% stated in the national development strategy before the crisis to between 4% and 5% in 2012, according to the Department of Economic Development (DED).

Free zones are central to Dubai’s development strategy as they are a key vehicle through which the government attracts foreign investment. There are currently over 20 free zones operating in the emirate. The Dubai Airport Free Zone was ranked the best free zone in the world in the Financial Times’ 2012 Global Free Zone Rankings (see analysis).

GROWTH STRATEGY: Given the new economic imperatives, Dubai’s growth story over the next five years will likely centre around the theme of efficiency. The government is cutting back excessive spending and focusing on leveraging existing investments to drive growth. The economy is functioning at about 15% capacity, according to the DED, implying that consolidation, efficiency and productivity gains could catalyse economic benefits. “Dubai-based firms that survived the crisis in good condition are looking to capitalise and take advantage of more realistic valuations. Plans are being outlined, and mergers and acquisitions will be made,” Marwan Shehadeh, managing director of Al Futtaim Group, told OBG.

Tourism will be another major driver of growth going forward, along with transport and logistics, industry and trade. Passenger traffic at Dubai International Airport is a key indicator and has continued to grow despite the economic slump of the past three years. This flow of people has had positive knock-on effects across the economy. Hotel occupancy rates, for example, have returned to pre-crisis levels, according to TRI Hospitality Consulting, with revenue per room jumping by up to 13% over the first half of 2012.

GROWTH STORY: Dubai witnessed strong economic expansion over the past decade, and ambitious targets for continued growth are in place with the Dubai Strategic Plan 2015. Dubai’s economy averaged over 10% growth between 2000 and 2010, according to the Dubai Economic Council, despite the global financial crisis. The emirate underwent rapid change as the government invested heavily in diversifying the economy. The focus of Dubai’s leadership on a long-term development strategy led it to invest its limited petroleum revenues in infrastructure and developing a business-friendly environment supported by a politically stable society.

Dubai’s economic environment has its roots in the commercial activity along Dubai Creek, a strip of water that runs through the city. The emirate began promoting business-friendly practices over 100 years ago when it offered pearl fishermen at Dubai Creek tax breaks. Given the creek’s pre-eminence in the pearl trade in those years, the government’s policy quickly established the city as a centre for trade and commerce. Dubai’s current standing as a global business centre parallels earlier days when traders from across the region established businesses near the creek to take advantage of tax incentives.

Building on early success, Sheikh Rashid bin Saeed Al Maktoum invested in dredging Dubai Creek in 1960 to allow larger ships into the city and enhance Dubai’s role as a major trading port. The tax breaks, expanded to cover a wider range of industries, encouraged traders from all over Asia to use Dubai as a re-export centre. A decade later, oil revenues flowing into the emirate were used to build what are arguably the two most transformative investments in the emirate’s history – Dubai Airport and the Jebel Ali Port, which serve as major conduits for foreign investment into the country, facilitating tourism, transport, logistics and trade.

GOVERNMENT-RELATED ENTITIES: Dubai has major stakes in several large companies often referred to as government-related entities (GREs). The government leverages these firms to invest and manage Dubai’s wealth as a part of the emirate’s economic diversification strategy. The portfolio of businesses and services these companies manage is impressive, covering seaports, real estate, hotels, airports and other business interests across the globe.

Most of Dubai’s largest and best-known companies are GREs, including Emirates Airlines, Dubai Aluminium Company (DUBAL), Dubai Airport Free Zone (DAFZA), Emirates NBD Bank, Commercial Bank of Dubai, Emirates National Oil Company, Jebel Ali Free Zone (JAFZA), the TECOM Free Zones and the Jumeirah Group. DP World, Dubai’s flagship marine port operator, is the emirate’s largest company with a market capitalisation of over Dh32bn ($8.7bn) in 2012. The government owns an estimated 80% of the firm through the Dubai Ports and Free Zone Authority.

Emaar, the second-largest company in the emirate, is one of the better-known GREs and engages primarily in property investment and development across a number of sectors, including housing, retail, hospitality, health care and education. The firm has transformed the physical landscape of Dubai with landmarks such as Burj Khalifa, the world’s tallest building. Another property giant, Nakheel, has also developed landmarks in Dubai, like the Palm Islands, an iconic archipelago of man-made islands that are a mix of both commercial and residential property.

All major GREs are managed by three holding companies: the Investment Corporation of Dubai (ICD), Dubai Holding and Dubai World. ICD, established in 2006, manages an estimated $70bn of assets, including some of Dubai’s largest corporations, such as Emirates NBD and DUBAL. Dubai Holding, partially owned by Sheikh Mohammed bin Rashid Al Maktoum, ruler of Dubai and deputy prime minister of the UAE, manages the Jumeirah Group, TECOM and Dubai Healthcare City, among other key assets. Finally, Dubai World owns a range of strategic entities, including JAFZA, DP World and Nakheel.

The corporate ownership structure of GREs is extremely complex. This was a significant factor in magnifying the impact of the global financial crisis in Dubai, as creditors were unable to assess the financial health of individual companies and more often than not simply assumed implicit public guarantees in the event of a default. However, significant reforms over the last three years have helped these firms restructure debt and meet major financial obligations. The government is gradually putting into place measures to increase organisational transparency and improve corporate governance.

JEBEL ALI PORT: DP World, one of the largest seaport operators in the world, manages Jebel Ali Port in Dubai. Jebel Ali Port handled 13m twenty-foot equivalent units (TEUs) in 2011 and is consistently ranked among the best container ports in the world (see Transport chapter). DP World is part owned by Dubai World and operates over 60 terminals handling 55m TEUs globally. The company currently has 10 new developments and major expansions under way in nine countries that will increase its total capacity to 103m TEUs by 2020. The firm posted revenues of over $1.5bn in the first half of 2012 and is investing in measures to improve efficiency, which brought a 3.1% increase in container revenue per TEU in the first half of 2012.

Jebel Ali Port is closely linked to Dubai’s other transport and business facilities, including Dubai International Airport’s cargo village, other ports and downtown Dubai via the city’s red line metro. Importantly, Jebel Ali Port is located adjacent to the Jebel Ali Free Zone (JAFZA). JAFZA was established to enhance the value of the seaport and other industrial facilities in 1985 and has since served as a cornerstone of economic growth over the past decade. JAFZA, also a part of the Dubai World conglomerate, served as the model for the emirate’s many other free zones and continues to account for the majority of its trade and industrial output.

FLYING HIGH: The second major investment that helped establish the emirate as a business, trade and tourism centre is Dubai International Airport. In 2011 passenger traffic at the airport reached nearly 51m, making it the fourth-busiest airport in the world for international passengers. The airport’s total capacity stood at 60m passengers per year, but will be expanded to 75m when the new terminal for the Airbus A380, which opened in early 2013, is fully operational. It serves over 150 airlines covering some 220 destinations and is a vital transport hub for cargo, handling over 1.1m tonnes of freight between January and June 2012 alone.

Emirates Airlines, Dubai’s flagship carrier, has been central to development as well. Established in 1985, the airline has grown rapidly and exemplifies Dubai’s economic growth story. A recent report by Oxford Economics estimated that the aviation sector supported some 259,000 jobs and helped generate over $11.7bn in Dubai, both directly and indirectly, through support for tourism and other industries in 2011.

Having grown to be one of the most successful carriers in the world, Emirates Airlines is a major contributor to the local economy in its own right. The airline has embarked on a rapid expansion plan and will need to add an additional 11,000 flight attendants in the coming years to its current register of 12,000 to manage its growing fleet of Airbus A380s. Unlike many other government-related companies in the UAE, the carrier does not receive public funding and has in fact paid out dividends to the ICD, the government-owned investment company. Oxford Economics reports that the aviation sector’s economic contribution to Dubai will rise dramatically, from 28% to 32% of the emirate’s GDP and will support over 370,000 jobs by 2020.

The combined impact of Dubai’s strategic sea and air transport links is immense, helping place the emirate at the centre of a transportation network that links two-thirds of the world’s population. The strategy of using transport links to drive business through the emirate is paying dividends. There are some challenges to this model as regional competition heats up and the global economy cools, but Dubai has shown it is capable of manoeuvring quickly to respond to global trends and is well placed to continue benefitting from trade and tourism as demand picks up.

ALUMINIUM: While Dubai is not generally associated with industrial production, aluminium has been closely linked with the emirate’s diversification strategy since the 1970s and is a major non-oil contributor to GDP. State-owned DUBAL was created in Jebel Ali village at the same time as the Jebel Ali Port was being built. Commercial production of aluminium started in 1980, with purchase agreements signed for the full capacity of 135,000 tonnes per annum with two US firms. DUBAL has since become one of the largest aluminium smelters in the world with a capacity to produce 1m tonnes of aluminium per annum (see Industry chapter).

This entire facility is supported by a 2350-MW power station, a 113 megalitre-per-day water desalination plant and dedicated port facilities at Jebel Ali Port. Total production capacity from the plant is pre-sold to more than 300 companies spanning 45 countries across the globe. According to company reports, DUBAL contributed an estimated Dh6.1bn ($1.7bn), or 2.5% of GDP, to the emirate’s economy in 2010. This represented 15.3% of the manufacturing sector’s contribution to GDP and is the single largest share of non-oil exports, representing 12% of the emirate’s exports in 2010.

The long-term future of Dubai’s aluminium industry relies upon maintaining low energy costs, which in turn depend upon access to inexpensive gas. DUBAL is moving ahead with Abu Dhabi’s Mubadala Development Company to develop the Emirates Aluminium (EMAL) project. This collaboration is part of a larger effort to streamline all UAE aluminium assets under one roof, leveraging economies of scale to improve efficiency across the industry. Alcoa, a major international aluminium producer, forecasts that international demand for aluminium will more than double by 2020, and Gulf countries are well positioned to take advantage of this growth in the industry.

DUBAL also plays a role in securing Dubai’s footprint in the global economy. It signed onto a joint venture with India’s Hindalco and the US’s Hydromine in 2008 to form Cameroon Alumina, which will exploit Cameroon’s vast bauxite reserves, estimated to be around 500m tonnes. DUBAL is also working with BHP Billiton, Mubadala and Global Alumina to mine bauxite in Guinea, and a recent deal took DUBAL to Brazil, where it has a stake in a joint venture with VALE and Norsk Hydro in a refinery project.

REAL ESTATE: Dubai’s development success is closely tied to its real estate market. It has been little over a decade since the emirate issued a decree in 2002 allowing foreign ownership of freehold property in selected areas of Dubai. This, combined with the emirate’s strategy of diversifying the economy into the financial and services sectors, led to tremendous growth in demand for real estate. Large-scale real estate development projects have defined Dubai’s image globally ever since, from the Palm Islands to the iconic Burj Al Arab hotel and Burj Khalifa.

However, rapid growth in the sector also led to rampant speculation in property markets. The IMF reports that at the height of the real estate bubble in the first half of 2008, the value of property transactions stood at over Dh46bn ($12.5bn). There has been a steep drop of over 65% in property values since. Despite a 50% rise in the number of transactions, the total value of real estate sales in the first half of 2012 was only Dh 12bn ($3.27bn), or 74% less than in 2008. Citigroup reports that projects worth a total of $757bn have been cancelled or put on hold since the burst of the property bubble in 2008.

However, there are signs of recovery. Government efforts to stabilise the economy and mitigate the impact of external factors, such as the regional political turmoil, have helped restore demand for property in the emirate. Indians, Britons, Pakistanis and Iranians, in particular, have been major investors in the sector since 2011. One key issue going forward will be the oversupply of office space. Despite relatively low occupancy rates in some areas in 2011, new office space continues to come on-line. Retail and hotel space, on the other hand, is likely to stabilise, as there are fewer projects in the pipeline.

SUPPORTING TOURISM: Dubai’s comprehensive development plans that leverage its proximity to Asian, African and European markets make it an attractive destination for regional and global tourism. Tourism accounted for 31% of the emirate’s GDP in 2011, according to the Department of Tourism and Commerce Marketing (DTCM). The sector is seen to be a key driver in Dubai’s diversified growth strategy, and DTCM aims to nearly double the number of visitors from 8.8m in 2012 to 15m by 2015. These plans are supported by investments in infrastructure, hotels, and a strong business and retail environment. While the financial crisis slowed growth in the sector, Dubai remains a popular regional destination and is likely to regain its standing going forward.

Despite the slump, Dubai’s hospitality sector remained strong in 2010 and 2011, registering 6% annual growth in hotel revenues supported by a 75% average hotel occupancy rate in 2011, according to the Dubai Statistics Centre. There were 387 hotels with almost 54,000 rooms in Dubai in 2011, up from 352 hotels with more than 43,400 rooms in 2009. The data shows that the bulk of these are categorised as four- or five-star hotels. Five-star hotels had by far the most number of guests, accounting for more than 2.5m visitors in 2011. While many of these guests continue arriving from GCC and European countries, Dubai is seeing tremendous growth in tourism from Asia and Africa, evidenced by an estimated 57% increase in tourists from China between 2009 and 2010, according to the Dubai Statistics Centre. This suggests that strong core demand remains, with attractive opportunities for growth in the near term.

BUSINESS TRAVEL: Tourism, both for leisure and business, has helped Dubai anchor its development strategy. The emirate continues to work towards positioning itself as a centre for global business, with regulations, reforms and incentives supporting continued growth in commercial tourism. Recent infrastructure developments, such as the metro rail connecting the city and the $33bn Dubai World Central aviation and logistics hub, facilitate the travel of goods and people through Dubai by linking logistics, residential and transportation facilities.

The meetings, incentives, conferences, and exhibitions (MICE) industry is also an important avenue for attracting visitors, and the segment is gradually growing in importance as a core economic activity for GCC countries. Dubai has led this trend, leveraging its strong transport and logistics infrastructure and physical positioning as a bridge between European, Asian and African markets. The Dubai World Trade Centre (DWTC) is one major initiative helping shape the sector in Dubai. According to DWTC, total spending associated with events managed through the centre contributed Dh6.5bn ($1.8bn) to the local economy in 2011. Regional trade and sales have also been influenced by events at the DWTC, indicating a broader impact on markets in the Middle East and North Africa region.

Similarly, economic free zones also attract business travellers to Dubai, and DTCM is actively promoting the emirate as a global centre for business, sports and leisure travel, with strategic ties with major markets like Brazil and China. Major property developments are coming back on-line after delays in the wake of the financial crisis, and are expected to support further growth in the sector. However, the government is following a prudent strategy in expanding tourism infrastructure, taking initial steps to assess each project for its commercial viability.

Dubai’s improving governance and political stability make it a safe and reliable spot in which to do business in the region. “The UAE’s strategic location between Asia, Europe and Africa and its close proximity to some of the fastest-growing emerging economies offer great advantages and opportunities to investors. With its open trade policy, re-export capacity, advanced port and logistics infrastructure as well as its proximity to these key markets, UAE is a gateway to many economies in the region,” Ali Babacan, deputy prime minister of Turkey, told OBG.

FREE ZONES: Dubai’s growth model has always depended heavily on attracting private finance into the local economy. Dubai Holding and Dubai World are the two main free zone operators in the emirate, managing most of the major business parks. Dubai World manages JAFZA through its Economic Zones World subsidiary. TECOM and TATWEER are Dubai Holding’s large investment groups owned by the government and responsible for managing free zones for information technology (IT), telecoms and real estate across the health, education and entertainment sectors. DIFC and Dubai Airport Free Zone (DAFZA) are the only major free zones operating outside of main umbrella operators.

Dubai’s free zone model was designed to facilitate investment in the local economy. The zones are characterised by streamlined legal and regulatory procedures and provide access to all the necessary infrastructure, including roads, ports, airports, office space, IT and business advisory services as necessary. Most free zones have standard incentives that include a tax-free environment with full foreign ownership, import duties exemptions and 100% profit repatriation. “The role of any free zone is to add value to the economy and positively contribute to GDP. In Dubai that role cannot be understated. Businesses operating from these economic zones are the primary factor driving the export and re-export market, and the importance of these economic clusters will continue to grow,” Mohammed Al Zarooni, director-general of DAFZA, told OBG.

LONG-TERM VISION: Dubai’s economic growth strategy is planned in line with a broader national vision set forth for the UAE and in coordination with the emirate’s medium-term development strategy. UAE Vision 2021 is built upon five major themes that seek to transform the UAE into “one of the best countries in the world by 2021”.

The emirate outlined its own strategy under the Dubai Strategic Plan 2015 (see analysis). The plan relies on five main pillars: economic development based on innovation and efficiency leveraging the private sector; social development; infrastructure, land and environmental development; security, justice and safety; and government excellence. The plan originally called for maintaining an economic growth rate of 11%, but this target is being revised in the wake of the global financial crisis, and will likely fall in the range of 4.5%, although a new version of the strategy has yet to be released.

Exemplifying commitment to long-term growth are plans for Mohammed bin Rashid City (MBR). Owned by Sheikh Mohammed and Emaar Properties, MBR is set to be the largest mix-use complex in the world and will include a series of commercial spaces, up to 100 hotels and a central park. The retail centres and the park are expected to receive 80m and 35m visitors a year, respectively. With an estimated cost of between $20bn and $50bn, MBR is indicative of the government and real estate sector’s faith in a rebound of the economy and Dubai’s endurance as a leading regional tourism and business destination (see Real Estate chapter).

REMITTANCES: Dubai depends heavily on an expatriate workforce, which is estimated to account for 96% of the total, according to the IMF. Bangladeshis, Indians and Pakistanis comprise almost 77% of the UAE’s total workforce, according to the World Bank, and another 7% are citizens of other Arab countries, including Egypt, Syria and Jordan. This population is responsible for sending home a significant amount of money in the form of remittances leaving the UAE – some $11bn in 2011, according to figures from the IMF. This flow of money is particularly important for countries in South Asia, which receive the vast majority of the remittances from the UAE.

REGIONAL COMPETITION: Dubai based its development on the successful Singapore model, and several other GCC countries have similarly adopted this approach. Qatar is one such country, and has arguably been the most successful in the region in developing a business-friendly environment, as well as a number of free trade zones that rival Dubai’s. Nevertheless, Qatar has yet to achieve the level of economic diversification Dubai has realised, and the neighbouring state still depends heavily on oil and gas revenues. Dubai has the early starter advantage and, despite recent economic tribulations, remains a sophisticated market for investors.

OUTLOOK: Authorities in Dubai are working to address the core economic and financial concerns exposed in the wake of the global financial crisis. International capital markets have demonstrated a renewed faith in Dubai’s economy, and investors are likely to continue investing as the government implements critical reforms. State spending is more stable and the deficit will fall as GREs embark on a more measured investment strategy. Perhaps the best indicator of improving economic conditions is the number of infrastructure and construction projects that are starting to come back on-line. The government is developing several major cultural centres, such as an art and opera district with museums, galleries and related infrastructure, to strengthen Dubai’s appeal to a broader audience and to help further diversify the economy. Emaar is on track with plans to expand the Dubai Mall, and the Dubai International Airport opened its third concourse, which will cater to Emirates Airlines’ fleet of Airbus A380, in early 2013.

The uncertainty generated by the eurozone crisis is still a major threat to Dubai’s economic resurgence, but the emirate is well positioned to ride it out. Political turmoil and tensions across the MENA region will have the dual impact of driving business to Dubai, which remains stable, but will also dampen demand for re-exports from Dubai if they continue indefinitely. Sanctions on Iran, for example, may have a negative impact, as the two countries remain major trading partners, and Iran remains a source of income through tourism and investments in the emirate’s real estate sector.

Dubai has already defied expectations by posting economic growth of almost 5% in 2011, according to the IMF. This trend was expected to continue in 2012, and growth will likely be driven by a focus on efficiency and productivity. Exports and re-exports picked up in 2012, but regional instability could threaten this growth. The DED forecasts GDP growth of 4-4.5% led by tourism, transport, trade and manufacturing. Construction is the only sector expected to slow, but this is likely to only be temporary as businesses and workers return to the emirate.