Dubai: Here We Go Again

A few years ago, when the Arab emirate of Dubai was facing the brunt of the global financial crisis, the government of Mohammed bin Rashid Al Maktoum blamed rampant real estate speculation as a major cause of his country’s economic woes.

Indeed, things got so bad that Dubai had to ask its more risk-averse and financially well-off neighbor Abu Dhabi for a loan and, as a show of gratitude, renamed Burj Dubai (the tallest man-made structure in the world) to Burj Khalifa after the president of the United Arab Emirates and Abu Dhabi’s ruler, Khalifa Bin Zayed.

After years of relative penny-pinching, recent data suggests things are turning around for the embattled emirate.

Economic growth is the strongest in five years (driven by hospitality and manufacturing sectors) and the market index has grown by over 40 percent this year alone.

Real estate prices have risen over 20 percent in the first quarter and construction on the mega-projects that had been stalled due to lack of funding is beginning again. Dubai’s ruler, Sheikh Maktoum, has begun discussing plans to attract Sharia-compliant banking and insurance funds.

Furthermore, the government has enacted rules to prevent the kind of profit-taking that caused emirates’ previous economic troubles by requiring bankers to pay the full price of the land and a 20 percent construction guarantee.

Finally, Standard Chartered Bank (SCB) has noted that the current growth is more realistic because it’s driven by a growing economy, rising demographics and a “return of confidence.”

Dubai’s rulers are likely breathing a sigh of relief at all these positive developments and blessing their luck at having survived the financial storm.

Unfortunately, it seems they have not entirely learned their lesson.

To begin with, Sheikh Maktoum remains focused on building the kind of lavish and harebrained structures that don’t generate any real primary revenue. For example, now that recovery seems to be at hand, he plans to build another island, the world’s tallest Ferris wheel and shopping mall, and numerous hotels, villas and public parks.

He seems to be ignoring Dubai’s weakness underlined in SCB’s own report that states economic growth is due to “logistics, hospitality and retail” with logistics being the primary driver. However, the growth in all three factors is because of “spending plans of most governments in the region.”

Well, how will Dubai’s growth be affected when these governments decide to ensure their spending plans benefit their own infrastructures and economies? On top of which, since the other two factors (demographics and return of confidence) are dependent on economic growth, if/when the first falls the rest will follow.

I posit that all three of these factors are not controlled by Dubai and hence they could vanish as easily as they appeared and, consequently, leave the emirate in the same position as in 2008.

Finally, let’s discuss the plan to attract Islamic financing. Dubai will face competition from bigger regional players such as Bahrain, Kuwait, Qatar and Saudi Arabia, who have longer history in this industry, and more resources and incentive.

On a positive note, Dubai’s has better technical infrastructure, less security instability and has been rated as the best place to live in the Middle East.

This means that while Dubai has some options, they are limited since it does not have the kind of natural resources that pin the economic growth of its neighbors and, while the government has made some impressive strides in making their emirate the jewel of the Middle East, their lavish and unrealistic development plans keep pulling Dubai down.

The bottom line is that Dubai has a lot of potential for long-term economic growth but this won’t come until the country’s rulers understand the limitations of their business model and begin to plan and live within them.