A Decade of Achievements and Challenges

But economic transformation of the UAE in general and Dubai in particular achieved over 10 years of boom and bust cannot be underrated. The challenges faced by the country’s economy are daunting indeed, but going by the track record of achievements throughout the decade this looks just like another phase in the development of a robust economy.

It was a testing period for economies in the Middle East when oil was selling at just around $20 a barrel and the affects of the dot-com bubble bursting of 200-2001 were exacerbated by the September 2001 terror attack on New York. But UAE took the challenge head on and in a move to replicate the success of the Jebel Ali Free Zone, Dubai Internet City, or DIC, a member of Dubai Holding subsidiary TECOM Investments, opened its doors in October 2000.

DIC presently has over one and half million square feet of prime commercial office space, in which nearly a thousand companies with over 10,000 workers are based, including many global information technology firms, such as Microsoft, IBM, Oracle Corporation, Sun Microsystems, Cisco, HP, Nokia and Siemens. Following DIC’s success Dubai Media City, Knowledge Village and IMPZ etc were established and attracted media and technology companies from around the globe.

The Dubai Financial Market (DFM) was established in March 2000 as a secondary market for trading securities and bonds, both local and foreign. The initiative was followed by establishment of Dubai International Financial Centre, a 110-acre free zone, which attracted high calibre firms from around the globe as well as the Gulf region. A world-class stock exchange, NASDAQ Dubai, formerly known as the Dubai International Financial Exchange or DIFX, opened in the DIFC in September 2005.

But the most daring initiative which transformed Dubai into a true first-world city was taken in May 2002, when His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, in an effort to reduce the emirate’s economic dependence on oil, issued a decree that for the first time allowed foreigners to buy and sell property. For years Burj Al Arab, the world’s tallest freestanding hotel was used to market Dubai as a tourism hub. But after the 2002 policy announcement a frenzy of private property development has recreated Dubai’s skyline with such projects as The Palm Islands, The World Islands, and Burj Dubai. To round off the massive infrastructure development of the decade, Dubai went on to build an impressive 75-kilometre rail transport system for the city. Dubai Metro opened on September 9, 2009, with the fanfare it deserved.

Most of what Dubai has achieved in the decade stands firm on the ground and forms the foundation on which the city will progress and contribute to the development of the UAE.

Still the year 2009 in so many ways will be remembered as probably the most difficult and challenging for the UAE economy. The last half of 2008 had unleashed the worst financial crisis the world has seen in decades and the New Year started with tidings of a deep and prolonged global recession. Management of the impacts of the global crisis and the resultant economic downturn continued through the year through various fiscal and monetary policy measures and more policy changes are likely as we enter a new year with hopes of a robust recovery.

Starting September 2008, the Federal government and most Emirates on their own took several steps to cushion possible negative effects of the global crisis. Still businesses across the seven emirates had no choice but to suffer the precipitous fall in asset prices, credit availability, global trade and consumer demand. As financial giants across the Western hemisphere collapsed one after the other and capital markets crashed, UAE saw its own list of companies seeking state rescue growing.

An abrupt and steep slide in oil prices wiped out most of the surpluses the country had reaped when oil prices soared for nearly six years to hit record highs near $150 a barrel in mid 2008. Coupled with a virtual seizure of the global credit markets, UAE for the first time emerged as a debt-laden nation with an unenviable task to refinance or payback billions of dollars. The most immediate threat to economic and financial stability at home was from the slide in property prices which punched a massive hole in the finances of local real estate developers, representing nearly half of all economic growth in some of the Emirates, and stunted lending by banks which were heavily exposed to home loans and payments to contracts. As possible financial meltdown had been avoided by emergency lending facilities setup by the UAE Central Bank and the Ministry of Finance in September and October last year and speculation on a run on banks had finally been put to rest in October when the government guaranteed bank deposits.

In November, trade in the stocks of the nation’s largest Islamic mortgage lenders, Amlak Finance and Tamweel, was suspended and a plan to merge the two financially-challenged entities was announced. The plan hit snags when several Federal National Council members challenged the wisdom of the proposed move. But senior government officials have recently stated that the plan was on track and regulatory requirements for the merger would be met in the next few months.

The year 2009 still started with a lot of doom and gloom about the prospects of business and the economy. To address concerns about availability and pricing of money, the Central Bank came up with its ultimate cut in a series of key interest rates cuts and lowered the overnight repurchase rate, or the rate at which banks borrow from it, to just 1 per cent in January.

In February the government of Abu Dhabi injected about $4.4 billion to recapitalise five of its major banks and a couple of weeks later Dubai launched a $20 billion bond programme. The first $10 billion tranche was fully subscribed by the Central Bank, and later another $5 billion were subscribed by two UAE banks. To further ease concerns about the emirate’s ability to meet its financial obligations estimated at a total of around $80 billion, the government of Abu Dhabi loaned $10 billion to Dubai in December which helped pay off some of the due debts of conglomerate 
Dubai World.

By the middle of the year it looked like a new storm was brewing, threatening the financial sector of the whole Gulf region, when the central bank of Saudi Arabia in quick succession in the month of June announced freezing of some assets and bank accounts of the country’s top industrial conglomerates Saad Group and Ahmad Hamad Al Gosaibi Group & Brothers. A month later the UAE Central Bank called up commercial banks of the country to discuss the potential problems due to exposure to probably the worst fallout from the global credit crisis to hit the region. Several UAE banks have since then reported their exposure to the troubled Saudi companies and their units across the region and some of them announced possible write offs and provisioning for the amount loaned.

In a major development in terms of financial market reform emerged when in August when the UAE Central Bank announced its plans to set up an Emirates Interbank Offered Rate (EIBOR) that would create an official benchmark for the dirham’s offered rate in the money market. The interbank rates immediately reacted and have dropped to levels which market participants believe better represent the prevailing conditions of fund availability. The central bank soon enough introduced the new benchmark and appointed 11 banks in the EIBOR-setting panel.

The property market continues to suffer even after falling by as much as 60 per cent in some Dubai localities. Recent estimate by experts and analysts see some stability returning but without ruling out further declines across the country. Recent polls have shown little hope of a strong recovery in 2010 and a small chance of rise in real estate prices and rents in 2011.While mergers and acquisitions deals were few and far in between across the world as valuations went haywire, UAE state investors were largely undeterred in their hunt for quality assets. Abu Dhabi went on to buy stakes in several technology, automotive, petroleum and chemical companies and very recently Dubai petroleum giant ENOC has placed its bids for Dragon Oil.

Dubai in several recent moves and policy pronouncements has shown its ability to adjust to the challenging global environment, shunning its debt-powered growth strategy for a more cautious approach to development.

ovais@khaleejtimes.com