What is the next step forward for Dubai?

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The 7.9 per cent rally on the Dubai Financial Market yesterday showed a measure of how confidence has been restored by news that the Dubai Government is issuing $20 billion in bonds, of which the UAE Central Bank has taken up the first $10 billion. But what comes next?

Dubai can really take one of three options: fire up the boom for a few months, maybe a little longer; make a project-by-project review and allocate money on a need-to-complete basis; or pay off its debts.

Debt repayment

Given that Dubai has some $15 billion in debt repayments due in 2009, of which presumably the $3.8 billion raised for the Borse Dubai repayment should be deducted, then clearly outstanding debts are likely to take the lion’s share of the new money.

However, it does look as though there will be sufficient money to allow the judicious completion of major works-in-progress. Indeed, we might surmise that the final figure of $20 billion was arrived with this purpose in mind.

It is right, therefore, for local business to breathe a sigh of relief, but that does not mean that the worst of the downsizing and pain from the very sharp business downturn since September is over.

Once the optimism of the immediate share price rally has receded, wiser heads will note that not much has changed in the immediate business outlook. The oil price shock from last summer has, in fact, only just started to make itself felt in new orders, or the lack of them.

Rightsizing

It is going to take some time to rightsize business models, and the weaker ones will not survive. Even government companies making losses may not be saved. This is how a business cycle works.

On the positive side, costs will fall, including salaries, rental prices, air fares and diesel fuel. All the same, adjusting input costs downwards is a tricky management problem, especially if you have just hired expensive new staff or signed a costly long-lease.

However, if business costs fall then new entrants will eventually be attracted into the market. For example, when the dust settles on the global financial crisis, major financial institutions will be looking for low-cost locations as the only way to raise profit levels in a depressed market.

Provided that Dubai’s cost levels do settle at a lower level that is competitive globally then its investment in world-class infrastructure will pay off, and those empty buildings begin to fill up with high earning expatriates.