An optimistic scenario for Dubai

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Drowning with debt left over from massive over-investment in real estate and ambitious mega projects, the conventional wisdom suggests that Dubai will take years to recover from the boom that ended in a crash last autumn.

Moreover, the over-supply of property will continue for the next couple of years as projects are completed, against a falling population as expatriates are sent home. Airlines report a surge in one-way ticket sales for this summer. What then could produce a fast turnaround for the Dubai economy?

Oil

The oil price, perhaps, is the obvious factor. Dubai is the trading, logistics and financial hub of the Middle East, and any uptick in the oil price is reflected in new orders for Dubai, albeit with a six month time lag.

The recent oil price recovery from $33 in December to $60 a barrel this month has therefore produced a slightly more optimistic tone amongst comments from local business. Green shoots in the desert maybe.

An almost unsaid whisper is that the multi-trillion dollar global stimulus and bank bailouts could end up by creating an big inflation like in the late 1970s. That would mean very much higher oil prices, and the Middle East would feel the immediate and concentrated benefit.

Taking that argument forward and Dubai could be among the first and biggest beneficiaries of the global economic reflation. This would be felt first in larger trade volumes and the stock market, and then begin to ripple out into other sectors.

The problem is, as Middle East leaders meeting at the World Economic Forum in Jordan this week optimistically noted, we do not know if recovery will take six or nine months, or it has to be said two or three years. Indeed, the oil price has actually just turned down from its $60 peak and looks to be heading lower, taking Saudi share prices down yesterday.

Market forces

It could be that there is another dip in the oil price before the cavalry finally arrives galloping over the hill, blazing us with inflated petrodollars. However, the early impact of the bailout packages on the oil price do give cautious reason for longer term optimism.

In the meantime, the more Dubai can do to get its own house in order the better, and then the impact of the oil price recovery – when it finally comes will be all the greater.