Foreigners do not understand Dubai
Posted on 19 January 2009 with no comments from readersOrder my book online from this link
After 12 years living in Dubai, and all of that time spent studying and writing about the business and economics of this city, I have probably gone native to the extent of having acquired significant knowledge about the inner workings of the local economy.
Yet I am constantly assailed by people who have just stepped off a plane from Europe or the USA and think they actually have something useful to say about Dubai business. The problem is always the same, they take their often limited knowledge of their own markets and assume that gives them an insight into what is going on here.
Debt illusions
Most of the time it is completely misleading. For example on debt: Western countries are floating on 300 per cent of GDP debt levels and they assume Dubai and the UAE are in the same boat.
Yet the UAE is a creditor nation, indeed it probably has the largest per capita surplus of any country in the world. Dubai’s debts due this year of around $15 billion are a drop in the ocean when compared with the $350 billion in net worth of the Abu Dhabi Investment Authority or the foreign assets owned by Dubai itself for that matter.
Then there is the problem of loans to developers and home owners. There could indeed be a crunch here with some business failures – but does the banking system of the UAE not have the highest capital ratios in the world, more than able to absorb bad loans, unlike, for instance the USA?
And how many home mortgages have been taken out since the start of foreign property ownership in 2002: 20,000 or more? It is absolutely nothing by comparison to home loans in more ‘advanced’ economies, and there have been very few defaults to date.
Car loans
The same can be said of car loans. Yes if a few thousand vehicles are left at the airport car park it is a problem for the airport to move them. But this is but a pin-prick in the balance sheets of the UAE banks who can sell those cars to get most of their money back.
Yesterday the Dubai Aerospace Enterprise raised an $800 million syndicated loan from Citi, Deutsche Bank, Emirates Bank International and Noor Islamic Bank. Presumably this will partly be used to buy planes to lease to Emirates Airline so that it can continue to expand while other global airlines struggle to find credit and cut services.
It is at times like these that the real strengths of the UAE come through: namely being able to continue to invest in the long-term at the best prices while other countries are forced to cut back.
For in the long-term the creditor nation always wins at the expense of the debtor nation, just watch and see! But that does not mean that business in the UAE will avoid a serious shake-out, job losses and consolidation. That is also good business practice.
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The UAE cut base rates to 1% today, down 50 basis points, while Goldman Sachs is now forecasting a sharp upswing in oil price in the second half of 2009 – the good times will return more quickly than some pessimists think possible. I am far less confident about the UK whose banking bailout today looks desperate and highly inflationary. Buying up UAE assets on the cheap would make sense.
I’m sure more than 20,000 mortgages have been issued – given the number of apartments around, that seems a little low.
Banks may be able to sell those cars on, but they’ll take a hit. Firstly there’s the question of who will buy them, particularly in times like these. Secondly, the price they’ll be able to get for them.
Take a 350,000Dh year old Range Rover like the one abandoned in my underground parking area. The moment it drove off the forecourt, it was worth 300,000Dhs. A year on and it’s sitting on its blocks, air suspension probably broken or damaged, filthy dirty, with no keys, no service history and needs recovering. After it’s recovered and fixed up, how much will it be worth?
Well, that’s exactly how I felt after I read your article about China – The problem is always the same, they take their often limited knowledge of their own markets and assume that gives them an insight into what is going on here. Sounds funny?!
Yes, Peter. I agree. Ignorance is the enemy of all people in all times. How interesting that the UAE appears to be a bastion of enlightened capitalism; the kind of capitalism that has an ethical base. It is for the country, and all its citizens. A new dawn rises in the world. Long may it prosper, and serve its people. There may be a shining example for others in other lands.
The UK government is bankrupting its people by committing inestimable taxpayers’ money to save bankrupt banks. The US is on the eve of doing the same.
They call it ‘quantitative easing’, and excuse it by citing Japan. One problem: the US and UK are debt junkies. Japan was and is a nation of savers.
What happens to debt junkies when they have an unlimited supply of money? Death by a thousand bailouts or more.
The UK used anti-terrorist laws to retrieve its nationals’ money from higher interest accounts in Iceland when that Nordic nation went bust. How ironic. The UK disowned a Northern tribe of its own ancestry, and now it will suffer the same fate: asphixiation when foreign banks no longer lend to the UK citizens, banks, companies, and government. Poetic justice, I think.
Abandon thine own, and abandon thyself. Twas ever thus. I hope the UAE stays true to itself; protects itself.
The £ continues to fall tonight.
Thanks for 3. it is a fair point if you have lived in China for 12 years. On 2. That is the whole point, the number of mortgages granted in the UAE to date is incredibly low in comparison to the building program, and that is both a strength now and gives room to raise lending in the future with lower cost loans from government sources; on cars you have a point but they are a lot less valuable than houses and apartments.
1. The problem is not with mortgage defaults, you are probably correct that the number of mortgages is about 20,000 or so. The problem on the other hand is the current unavailability of mortgages and the dominance of the so called ‘flippers’ those who have paid about 5-10% for their apratments and do not have the capability to pay any more.
2. Everyone seems to assume that Dubai can go on with its profligate spending and if not runs out of money, Abu Dhabi will be ready to fork out the cash without asking for anything in return. As for Dubai’s asset, are you assuming that they haven’t gone down in value significantly? Just to give one example, Dubai World spent about USD 3 bn to acquire shares in MGM Mirage @ approx USD 84 per share. The co is trading at about 9. What I am trying to say here is that the Dubai government is in the same kind of trouble that Citi and it ilk are facing in the US. Hope Abu Dhabi continues to be as benovelent as the Fed.
The Most important challenge GM faces is to win back the trust of the tax payers. Giving away billions of tax payer money is not going to go under good sights of the consumers