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Sun 2 Oct 2011 10:58 AM

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The crisis returns

As the West faces up to a second downturn, the UAE's top business leaders predict just how bad things could get here

The crisis returns
Sheikh Ahmed says the GCC has nothing to fear from a double-dip recession

The mood is grim at the address Hotel in Downtown Dubai. Overlooking the iconic Burj Khalifa, the hotel has become a vantage point for viewing the spectacular dancing fountain that comes to life several times a day. But as we wait for the arrival of two of the UAE’s most senior government leaders, smiles are hard to come by and the music from the fountains is being drowned out by talk of a second global recession.

Gold has just slumped another $60, silver has plunged again to record losses of 40 percent in one week alone. Britain’s top 100 companies have lost $117bn in value the previous week, while the International Labour Organisation has just warned that G20 countries could end up losing 40 million jobs by 2012. Somehow, news of the eurozone’s plan for $2.6 trillion bailout for debt ridden countries, being flashed in the television screens at the hotel’s reception, goes unnoticed.

Everyone wants to know only one thing: is the crisis going to spread to the region? It is Sheikh Ahmed Bin Saeed Al Maktoum, chairman of state-backed conglomerate Dubai World and Emirates Airline, who appears first. Amidst the chaos, he is (as always) a figure of calm. Is he worried about a slowdown in the local economy and the event that Abu Dhabi could, as experts have warned, be affected?

“I’m not worried about Abu Dhabi at all.”

But does he not fear a global double dip recession? “Worldwide, I don’t know if we are headed for a double dip recession, but I am not worried here, in this region.”

Should he be? Growth forecasts around the world are being revised, in some cases completely re-written. In the UK, the International Monetary Fund is predicting just 1.1 percent growth for 2011, compared to its two percent forecast at the start of the year. Four of the G20 countries — Italy, France, South Africa and the US — are now expected to grow at less than one percent this year, while global growth is now set for just four percent in the best case scenario.

“I’m not really [concerned]. Sometimes the whole world is together whatever the effect could affect here but I think things are improving,” says Sheikh Ahmed. He points to Nakheel’s announcement last week of a new project on the Palm Jumeirah, and hints of big orders to come from his own company Emirates Airline at the Dubai Airshow in November.

“I would say it’s more positive that we might sign something,” he says.

As chairman of Dubai’s Supreme Fiscal Committee, Sheikh Ahmed knows the detailed picture better than most. And the positive outlook is shared by many UAE ministers, who are sticking by their own positive outlooks. UAE Minister of Economy, Sultan Bin Saeed Al Mansouri, tells Arabian Business that the country’s economic growth for 2011 is on track and will likely exceed expectations. “According to the data, oil prices, trade and industry figures… there will be a positive economic growth for this year. My expectation is that the growth will be more than three to 3.5 percent this year,” he says.

But not everyone agrees, with most analysts suggesting that just like 2008, the crisis in the West is fast heading East.

“Eurozone debt crisis will have ramifications for the GCC directly both from a trade and investment perspective, especially in a worst case scenario that would see contagion mushroom from Europe and across the globe,” says Domluke Da Silva, executive committee member and chair-advocacy for the CFA Emirates Society.

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He adds: “In such a case the GCC would not be immune especially given the close trade and business ties with European institutions. The erosion of asset prices would also impact on investors in the GCC, both sovereign and private, as mounting losses in their portfolios force them to revise any new investments whether globally or locally.

“I believe that markets globally are very nervous and investors are opting to be safe rather than sorry, and will remain cautious for the foreseeable future especially as uncertainty reigns over whether a double dip recession might return with a vengeance.”

The HSBC UAE purchasing managers’ index saw business activity in the UAE fall to a fifteen-month low in August, indicating that the Gulf state’s private sector could already be feeling the impact of a global slowdown.

The UAE, particularly Dubai, was hit hard by the global financial downturn, which saw property prices plummet over 60 percent from their 2008-peak and forced state-backed Dubai World to ask creditors to change terms on $24.9bn of debt. The central bank in November 2009 established an emergency facility in a bid to support liquidity in the days following the Dubai World announcement, which rocked global markets.

Banks in the region, particularly the UAE, are not exactly falling over themselves with lending policies ever since Dubai’s debt restructuring, though their exposure to eurozone debt is unclear. According to Reuters, UAE Central Bank data shows that provisions of UAE lenders against bad loans rose this year to $13.2bn, the highest figure since the end of 2008.

But again, the Minister of Economy is unfazed, insisting: “UAE banks have taken the necessary provisions to deal with these issues.”

The Gulf state’s economy shrank 1.6 percent in 2009, the first contraction since 1988, but increased 1.4 percent the following year, according official statistics.

The UAE’s status as a safe haven amid the political turmoil in the region this year has helped boost tourism with hotel occupancies in Dubai at 75.5 percent in the first half of the year, up from 70 percent the previous year.

Al Mansouri points to the increase in tourism as well as the relative stability of oil prices for his optimism looking ahead. “The oil prices are still holding. If you look at the difference between the first nine months of this year against last year, there’s a difference of almost $14 plus for this year. So already there is a positive indication on the UAE economy,” he explains.

“If you look at tourism, it’s moving, which is another indication that there are lots of positives in the economy here,” he adds.

While Al Mansouri sees plenty of “positives”, regional markets are reserving judgment. Six months ago the Dubai Financial Market stood at 1563 points — today it is hovering around 1450, a loss of eight percent. Likewise, the Saudi Tadawul has shed exactly the same amount over this period.

“So far, GCC equities have held up relatively well compared with European and US markets (with the exception of Bahrain), in part because we did not have the same recovery here that there was in the West, and in part because of a less gloomy economic outlook,” says Liz Martins, senior economist at HSBC Middle East, adding:  “The fall in prices is not too big a problem so far, but adds to a difficult financing climate for companies and hurts confidence. The outlook for global markets is not particularly positive, and there’s no reason to believe MENA will escape unscathed from that - there is still some degree of contagion.”

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Nevertheless, other experts suggest the figures if anything back Al Mansouri’s upbeat mood. Despite the drops, the actual volatility (total swing) in regional markets is far less than those in the West. Over the past 30 days, the Abu Dhabi Stock Exchange has swung by only 5.8 percent; Dubai by 9.7 percent; Qatar 11.1 percent; Oman 11.2 percent; Kuwait 11.5 percent; KSA 16.7 percent; Egypt 22.3 percent.

Compare that to the FTSE 100 where the figure is 33.2 percent and Germany’s DAX at 44.5 percent.

“From what I can see, the Gulf equity markets have been relatively insulated against the latest surge of uncertainty regarding the European crisis,” says Akis Dalgiannakis, head of trading at Mubasher Financial Services. But he adds: “Longer-term, if the European crisis persists, it could clearly create significant headwinds for the global economy, with a negative impact on the oil price and hence the Gulf economies.”

The Arab Spring may have boosted the UAE's tourism sector but property prices remain weak. International property consultants Jones Lang LaSalle warned last week that a recovery in demand could be delayed by slowing growth in the US and Europe while an additional 5,000 homes expected by the end of the year could delay a recovery.

Al Mansouri, who told Arabian Business in January that property prices would start to show signs of recovery by the end of 2011, says stable real estate prices remain paramount to economic growth. “The most important thing that we are looking at is creating stability in the market, which we have managed,” he says.

“The UAE seems to be one of the places that with political stability [and] the ability of the government to address issues in a very proactive way, has [acted] as a sort of magnet towards bringing back the confidence in the markets here and also providing for the hopefully positive growth as we go on in the next few years,” he explains.

Property prices and tourism aside, Al Mansouri is keen to stress the UAE’s ability to act quickly amid market turmoil and learn from the experience of the past few years.

“Out of the last three and a half years' experience we came out very strong in terms of how to deal with these issues…and address them in a way so that at the end of the day we have the depth and the ability to resolve them. We have the ability to really act as opposed to other countries where the structure and system there doesn’t allow for that, so we are blessed with that.”

Whether he is right, only a time will tell. A day after Sheikh Ahmed’s appearance at The Address Hotel, he is back in the heart of Dubai, this time attending Cityscape Global 2011. Twenty four hours can be a long time in the financial world, and news breaks that judges in Germany could derail plans for the $1.7 trillion bailout, claiming a referendum would first be needed. If that happens, the consequences for the rest of the world — would be incalculable.

Is Sheikh Ahmed still not worried? He smiles widely. “I don’t think the Europeans will let it go down, they will do their best.”

bkay 8 years ago

Isn't it astonishing, living here in the UAE, one hears about the exit of the Euro, crises in Europe and the poor US industrial and financial performances.
My meetings in Europe last week, I hear only about the unrest and financial chaos in the GCC region, no investment platform, high risk and sovereign downgrades, a place to stay away from.

One would think that to pull out of this global down-turn a bit more co-hesion and joint efforts would be exercised...unfortunately it seems that each party is scrambling for its own survival, which may well turn into a prolonged crises, which is further re-enforced by the greedy financial institutions, whom are ruling the global economy, where this should really be the other way around.

Tasnim 8 years ago

Crisis is cyclical and has occured several times over the centuries all over the globe and at times on parts of the globe. Often repeated, it's hard to beleive the economists fail to understand it & avoid it from repeating. From a common man's knowledge I understand that employment and consumerism keeps away the crisis which created a middle income group apart from the super rich, rich and the poor. The gap is still very wide between the rich and the poor whether there is crisis or not, the rich remains richer and the poor always poorer. Is it time to apply actively (not to think) that the wealthy countries, companies and people share their wealth to eradicate the inequality among their fellow citizens and countries. We need employment and we require consumers at all levels, left unattended the middle income group will vanish and only the poor will remain eventually the rich and the super rich will become poorer too. Time to apply what you learned so far.