Dubai freezes salaries, boosts spending 42%
Posted on 11 January 2009 with no comments from readersOrder my book online from this link
The new Dubai Government budget is freezing salaries and hiking public spending by 42 per cent to $10.2 billion, assuming a $1.1 billion deficit, with 45 per cent allocated to the Roads and Transport Authority.
This budget is intended to support the local economy which has been hit by a liquidity squeeze since last autumn and falling oil prices. The US dollar has also unexpectedly strengthened undermining local competitive advantages in tourism and real estate.
$80bn debt
However, this is clearly only the first stage in a proactive response to the crisis by Dubai Government. The government has previously revealed $80 billion in debts but said it will have no problem in servicing them. Rumors abound of asset sales but none have been confirmed.
The focus of attention is likely to shift to the UAE central bank, and an end to the liquidity squeeze by a more accommodating monetary policy, something along the lines of quantitative easing now favored in the US.
The central bank has pressured local banks to lower their loan-to-deposit ratios and kept the lid on deposit reserves, effectively draining the local market of liquidity after the very high level of loan commitments made in the first half of last year.
This aspect of the local economic crisis is purely self-inflicted, and lends itself to another proactive solution, although the provision of finance through the banking system rather than directly into real estate entities is preferable to avoid reigniting the boom by reckless financing.
Realty reality
More end-user finance for property is definitely going to be needed in 2009 or some of the estimated 34,000 new units delivered this year in Dubai risk standing empty.
Local business has been caught out by the speed of the downturn in Dubai, which was not really evident until after oil prices peaked last summer. The pull-back has been sharp but the hope is that with proactive management the last economy to feel the global economic crisis might also be the first to come out of it.
Certainly the UAE central bank has been able to take a very conventional approach to liquidity management which actually sets the economy up for a rebound as conditions improve, while Western central banks are panicking and going for highly inflationary monetary policy. It does not need much analysis to understand which is the stronger economic model.
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Three things to watch for real estate recovery in UAE
1. Job creation , can UAE add more service jobs
2. Control supply of real estate units to manage demand effectively
3. Affordable Mortegage availability by creating large Govt.backed fiancial institutions.
Rest is all noise and endless ifs and buts…..
Spot On! I don’t see why the UAE should not go for low-cost home and real estate loans to reflate the economy – but the central bank seems to be hesitating about this – however, I do have confidence that the business dynamics will work through.
Lower rents thanks to a housing collapse would attract service business like nothing else and stop any more home building for a while. Sometimes the free market works – and the hands off central bank might work better than rampant government spending as seen in the US, UK, europe and Japan.
The problem is that banks can not provide low cost loans to home owners in UAE due to the fact that down side risk has gone up and so is EIBOR(going in opposit direction from LIBOR).Why becouse banks in UAE are scared to lend to each other and mortgage securitzing market disappred, CB is not cutting interest rates in line with FED. Other problem is lower LTV. It is becose you do not know what is V- i.e value. Therefore, 70% LTV could effecively be 100% if values go down by 30% which is so called financial gurus are talking about in local press every day(depending on whom you talk to ).
Solution? Create Govt. backed Mortegage providers like Abu Dhabi Finance Co. and Real Estate Bank and provide them with required liquiditing to ease the mortegage related liquidity crunch/Guarantee Assets.
End users will bite and UAE real estate market will enter in to its second phase of long term investors and home owners . Thereafter, let the market forces decide where we are headed, hopefully north.
On the other hand overall economy will continue to grow becouse UAE have better economic fundamentals then rest of the world. It is a small economy and manours are simple and easily doable. The wise infrastucture building over the last five years should start to pay back now… we are set to become a major hub for logistic/wherhousing and re-export after Al Maktoum Air port start functioning with its state of the art facilities and all the other Free Zones ( DHC, Media, Silicon, Dubaitech etc. ) should also provide sustainable growth.
Hang in there folks, sun is still shining in Dubai…