DUBAI: Many experts in Dubai predict that the health of the emirate s economy will only be mildly affected by the ongoing international financial crisis, though a further draining of liquidity is a matter of concern. As evidence of some degree of nervousness, the central bank of the United Arab Emirates (UAE) announced on September 22 that it was making $13.6 billion available to local banks to bridge any liquidity shortfalls. Both the government of Dubai and local banks have been at pains to stress the health of the emirate s financial sector, emphasizing the low levels of exposure to failing US banks. While this may be true, the tightening of the international credit market has made it harder for banks to obtain short-term funding to cover their obligations, thus spurring the central bank s emergency reserve. Though some concern was voiced over the central bank s move, most viewed it as a measure to reassure the markets. To date, no bank in Dubai or elsewhere in the UAE has availed itself of the credit facility. There are conflicting views on whether the global economic downturn will have a major effect on Dubai s property market. High demand and shortages have driven up prices at a rate some believe cannot be sustained, especially in the current economic climate. According to Richard Rodriguez, formally the chief executive of Dubai s Emaar Properties, some of the heat will go out of the emirate s long running property boom. Either the pace will drop or the prices will. Both cannot be sustained in these market conditions, he told international media on September 29. While a number of industry reports have suggested there could be a 10-20 percent drop in property prices over the next two years, this is more related to supply catching up with demand than to any economic slowdown, as more major real estate projects are completed and more units come onto the market. According to Sean Gardiner, head of research for the Middle East and North Africa at Morgan Stanley, it is more likely there will be an easing rather than a crash in the market, which has seen property prices rise by just under 80 percent since the beginning of 2007. The good news for Dubai is that you have underlying economic strength, and as a result, our base case reflects a soft landing for the emirate, Gardiner told Reuters news agency on September 24. There is no doubt the crisis is affecting the Dubai stock exchange, which has shed 32 percent in value since the beginning of the year. However, Mandagolathur Raghu, head of research at asset management firm Markaz, believes the slide on regional markets is only temporary. Given that the economies of the gulf states are growing at least three to four times the rate of those in the US and Europe, he says the basic financial strength of the region could soon see sentiment do an about face. A rush to sell GCC stocks as if there is no tomorrow is akin to ignoring strong fundamentals that completely differentiate the region from the rest of the world, Raghu said in a statement to local media on September 29. Though there has been no wholesale exodus, there has been a retreat from Dubai markets by overseas investors. In the week ending September 27, the level of foreign equity investment on the emirate s exchange fell by $73.4 million, according to a statement issued by the Dubai Financial Market (DFM). This retreat might only be temporary though. In its World Investment Report 2008, the United Nations said that while it predicts a downturn in the global trend for investments, with a 10 percent fall in FDI overall, there will actually be an increase of inward capital flow into the Gulf countries. With the region being largely unaffected by the sub-prime mortgage crisis, and with a significant number of major investment energy and construction projects in the pipeline, capital inflow will remain strong, said the report, issued on September 24. With the global economy teetering on recession, Dubai investors may well be more circumspect in their overseas outlays, waiting to see which way the winds blow. A case in point could be Dubai World, the government s investment arm. According to local media, Dubai World has withdrawn from a planned $5.3 billion deal to take control of Russia s largest electricity producer OGK-1. The recent steep dive of the Russian utility s share price, which has plunged 70 percent in the past few months, and uncertainty over market conditions and the Russian economy have all been cited as reasons for the Dubai investor s cooling of interest. Dubai will certainly be affected by a global recession or a slump in the US economy. But with an expanding economic base, ample reserves, high domestic demand and a strong program of infrastructure and development projects drawing investment, Dubai may find itself better equipped than others to handle a crisis. -This article was published by Oxford Business Group on October 2, 2008.
