By Christopher Davidson. Christopher Davidson is a fellow of the Institute for Middle Eastern Studies at Durham University. He is the author of "Dubai: The Vulnerability of Success" and "The United Arab Emirates: A Study in Survival." This commentary first appeared at bitterlemons-international.org, an online newsletter. Here it is:
The credit crunch is moving around the world, claiming new scalps every week. Toxicity has spread from mature US financials to Europe and Britain and now it is the turn of the developing world. When the crunch hits a region, confidence rapidly falls, banks are jeopardized and credit dries up. The Western extractive states have been able to rescue their financial sectors by part-nationalizing banks and injecting liquidity. These are abilities that weaker states do not have.
Thus far, the Gulf states have remained fairly isolated from the impact of the crunch, partly due to the cushioning effect of surplus liquidity in their immediate neighborhood and the unspoken guarantee that massive sovereign wealth can be used to shore up any domestic collapse. Indeed, up until a few months ago the mood had been one of optimism, with many stakeholders in these economies contending that the region is impervious to the West's problems and that it is has successfully decoupled from any global recession. Rightly, it has been argued that even plummeting oil prices are not a problem, as the annualized returns from the various overseas investment funds in many cases exceed total oil revenues.
This view does not however appreciate the heterogeneity of Gulf states' economies. Certainly, Kuwait, Qatar and the UAE's Abu Dhabi are in very good shape: They have massive oil and gas exports and the largest sovereign wealth assets in the world. They also have relatively small national populations to distribute their wealth to. But in contrast, the more resource-scarce Gulf states, notably Bahrain, Oman and the UAE's Dubai, are now highly exposed to the credit crunch.
Since the 1990s, these economies have sought to diversify their economies away from hydrocarbon exports and heavy, energy-reliant industries, often by building up new sectors such as real estate and tourism. On paper this diversification has been successful: Other associated sectors such as construction have boomed, and in Dubai's case the non-oil share of the emirate's GDP has grown to over 90 percent. Moreover, the rapid economic liberalization required to kick-start these new sectors and the many lavish projects they have involved have won these countries international recognition and praise.
The year 2008 will, however, expose the fundamental flaws in these new post-oil economies. They have been built on a wave of global boom, relying on excess liquidity in their oil-rich neighbors and massive and uninterrupted foreign direct investment from further afield, often from the West. Indeed, they have never been put to the test as they have yet to really experience a true boom-bust cycle. The sectors that have been developed are particularly sensitive to a global downswing, indeed are prime examples of "peripheral economies" that have to respond in a dependent fashion to circumstances and retrenchment decision-making in the world's "core economies".
The biggest victim is likely to be Dubai, as real estate and tourism (and by extension construction) have been allowed to develop into the key pillars of the economy. No moratorium has been placed on the expansion of these sectors and the city state has grown wildly in the last few years, with growth rates that would normally be associated with an overheating economy and rampant, unrestrained speculation. Furthermore, few sustainable economic activities have been introduced and attempts to build a vibrant knowledge economy have remained stalled.
International financial observers and realtors have now begun to identify worrying trends: rapidly declining house prices, a stagnant resale market, the inability of off-plan property investors to keep up with their payment schedules, a marked decline in hotel occupancy rates and wage and hiring freezes in property companies. To make matters worse, they have highlighted the government's indebtedness: Dubai has borrowed heavily in recent years to finance all of the physical infrastructure needed to support and connect these new economic sectors. Thus, if the situation should deteriorate further - as it may well be doing given that large mortgage lenders have already had to be merged - there is a question mark as to whether the government can step in and come to the rescue.
But in some ways, the true merits or demerits of the Dubai model may never come to light, as the UAE brand is likely to be resurrected should Abu Dhabi intervene and bail out its close neighbor.
These are not my words, and they do not tell us implicitly of any take-overs, but one can read in between the lines that something will have to happen, if this is not happening already, behind the scenes. AUH will not do any deal(s) unless the move is advantageous for the Al Nahyan Household let alone the Emirate itself if referring to institutional terms. It won't be a temporary gig
.
One thing is certain; they will hide it for as long as possible. Once in the open
, this will be vehemently denied by the WAM News Agency. I'll be here to see
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