Highlights
– The United Arab Emirates faces a serious economic decline
– Dubai Financial Market Stock index dropped 70 percent last year
– Brain drain in the region likely to further complicate financial crisis
This week, global stock markets continued their extended slide. While investors in the west are understandably fretful, losses on the New York and London exchanges look modest compared to what happened in the Persian Gulf.
The United Arab Emirates in particular have witnessed a significant change in fortune. According to a Swiss banker, in the past five years wealthy local families have seen tremendous returns on two fronts: local equities and local real estate. These assets outshone any returns they could get in developed economies. Now these two markets have been “completely crushed” according to Wealth-Bulletin.com, an online financial service.
Economic Decline, Facts and Figures
The Dubai Financial Market Stock index dropped 70 percent last year, and continues to fall through the first quarter of 2009. Dubai’s neighbor and the capital of the UAE, Abu Dhabi, fared slightly better, but still experienced astonishing declines.
Average apartment and villa prices in Dubai have dropped anywhere from 25 to 50 percent, according to a variety of estimates including a recent review by HSBC. Sales in the now legendary secondary or end user market (people seeking to buy and resell residences), have slowed to a halt, according to The National Online, a news magazine focused on the region. Nearly half the current constructions projects in Dubai are on hold.
Clearly the party is over, at least for the near term. But structural conditions are likely required to improve the longterm financial and social viability of Dubai, and the country in general.
First and foremost is financial diversification. The Emirates rightly realized years ago that oil was not a long-term wealth builder, and boldly moved into new business areas to include real estate and capital management. The UAE got the strategy right, but fell victim to the global capital and real estate financial frenzy driven by liquidity offered by complex financial instruments, easy credit conditions, and real petroleum dollars. The bottom fell out of the Dubai and Emirati markets when these three conditions evaporated.
Second, Dubai in particular and the Emirates in general need increased transparency to assure current and future investors. Complex regulations regarding so-called freehold (permanent) real estate ownership and visa or citizenship restrictions on landowners must be clarified and liberalized in order broaden buying confidence.
Finally, Dubai operates “debtor prisons”, according to a recent New York Times article. Clearly, these must be addressed.
Forecast
We believe the UAE will weather the current economic conditions well enough. A recent financial bailout by Abu Dhabi has restored confidence in the near term. But the UAE will continue to suffer.