How long for business activity to recover in Dubai?

Posted on 28 September 2009 with no comments from readers

Dr Marc Faber established a model of the emerging market business cycle in his classic book ‘Tomorrow’s Gold’ published in 2002. It describes the phases of the business cycle from boom to bust and back again.

On my reckoning Dubai is probably in phase six of this cycle now, although possibly only just. Phase six is when the business cycle starts to bottom out, and this continues into phase zero where a new base is established for the next boom.

As Dr. Faber notes the down phases of five and six can be compressed into a year, as in the Asian Financial Crisis but can take four to six years.

Phase six

The symptoms of phase six are clearly visible in Dubai today. Dr. Faber lists these:

- International press depicts country very negatively
- Foreign brokers turn bearish and close offices
- Assets in mutual funds down by around 90%
- Flights, hotels and nightclubs are empty
- Men go out to work but spend day in the park
- Taxi drivers etc tell you how much they lost in the boom

If confirmation is needed then consider his list of symptoms for the previous phase five:

- Empty offices, high vacancy in hotels
- Discontinued and unfinished construction sites
- Unemployment begins to rise
- Budget surpluses replaced by deficits
- Stockbrokers close down and layoff staff
- Research reports on the country get thinner
- Country no longer a favorite tourist destination

You can always nit-pick and note that beach hotels are still busy, although city hotels much less so and at lower room rates. But there is a great deal of truth in his analysis as he continues:

‘In phase six, the error of pessimism will depress business and result in a prolonged contraction… Whereas a few years earlier everybody wished to participate in the mania, now everybody wants to get out.’

Error of pessimism

This period of depression is the opposite of the optimism seen in the boom years. Dr. Faber then characterizes a phase zero before the upturn in business conditions in phase one.

Phase zero is the classic bombed-out economy with low levels of volume on the stock exchange with prices stable but low, empty hotels, ridiculously cheap asset prices, hardly any foreign fund managers, tight credit due to bad debts from the boom, negative press, and no foreign investment interest.

To dig an economy out of phase zero requires a ‘spark’ or more probably a series of sparks like economic reforms, ‘the rise in price of an important commodity’, increasing exports, completion of important infrastructure projects and privatization.

It is encouraging to see that within the context of the UAE it is quite easy to imagine what this spark might be: a surge in oil prices, and many of the other sparks too. However, that could still be someway off if the global economic recovery proves as slow as most economists say.

In the meantime a former boom economy like Dubai will have to work its way painfully through the down phases of the emerging market business cycle. That is not to say there will not be opportunities, but most people will miss them through pessimism or by still being broke from the boom.

Phase one

How will we know when phase one has been reached and recovery is on the horizon? Dr. Faber again gives a helpful list of symptoms to watch out for:

- Increase in cash balances due to rising profits
- Credit conditions ease and consumption rises
- Stocks suddenly begin to pick up
- Tourism improves
- The unemployment rate begins to decline
- A few far-sighted foreign businessmen become interested in joint ventures
- A few contrarian fund managers start to invest
- Hotel occupancy up
- Business confidence rises significantly
- Families buy back shares in their companies

So clearly there is light at the end of the tunnel as business activity always moves in cycles. The trickiest thing is knowing when the bottom has been reached, or phase zero, and how long that will last.

But moving straight back into another boom after just a year of contraction, in the case of Dubai, would not appear a realistic proposition using this analysis. You would expect to bump along the bottom for a few years at least.

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