How far down will oil’s descent take the UAE economy?
The UAE will be in recession next year. How can it be otherwise, when oil prices are cut in half and oil revenue makes up a third of the national GDP? You might hope that non-oil growth will compensate for the loss of oil revenue, but then how can that happen when most of the non-oil revenues are from trade with countries even more dependent on oil income? I’ve lived through two recessions here, so this will be my third.
This does not look like a rerun of events in 2009-10. Abu Dhabi prevented that happening by putting a brake on the housing boom late last year. True, Dubai is still busy putting a canal under Sheikh Zayed Road. But this is not like 2009, when hundreds of billions’ worth of projects went ahead simultaneously then stopped suddenly, leaving a pile of debts.
Sure, the debts are still there, albeit refinanced at much lower interest rates on longer tenures. A repeat of the Dubai World US$25 billion debt standstill is highly unlikely – the bankers have made sure of that. Dubai will be able to carry on building, although some projects will go slow and some actually stop for a period. Abu Dhabi will probably follow the same path with its pharaonic public works.
This is reminiscent of the recession of 1999-2000. Then the oil price actually crashed lower than in 2008, and fell below $10. For the local oil sector it was a complete nightmare, with bankruptcies and shattered dreams. Strangely, the local economy sort of muddled through and was comparatively unaffected.
The twin Emirates Towers were completed, one of them the tallest office building in the Middle East, and so too the Burj Al Arab hotel. I returned to the UK to the write my first book but was astonished to find rents little changed on returning in 2000. The actual demand for accommodation in Dubai hardly slipped despite an Armageddon scenario for oil revenues. In truth, the oil states went deeply into debt to maintain public spending, and a lot of contractors’ bills went unpaid for several years.
On the other hand, 2009-10 was a much rougher recession because of the double whammy of the global financial crisis and the local real estate bubble. Official figures published at the time showed a 40 per cent slump in Dubai’s trade in the first half of 2009, a truly devastating depression. Emergency money printing and drip feeds for almost every bank in the world from the Federal Reserve had the patient off life support relatively quickly.
The same money printing then fed back into the commodity complex and Chinese construction projects and oil prices roared back to life – that is why the UAE economy recovered so sharply over the past two to three years. Local real estate and equity prices have been major beneficiaries.
So what comes next? What has been different so far this time is the resilience of global stock markets. In 2008 they started to crash in September, then it got really ugly. The bottom followed in March 2009, with the S&P500 at a memorable 666. It is 70 per cent higher today, but for how much longer? If the oil price is any guide it is set for an imminent fall.
In a global financial crisis part two, the oil price would fall still lower. From 2001-04, oil used to trade in a $22-$28 band, and yet that was enough for the UAE economy to grow at a very healthy pace. However, local stock market prices did not really start to recover until 2004.
Both the stock markets and real estate were smaller and far less mature markets in those days. The final legislation for foreign ownership of property was promised in 2002 but not signed off. The Dubai Financial Market only got its first trading floor in 2000. That said, real estate prices essentially went nowhere until 2004, when the oil price really began to rise sharply.
What would this historical parallel seem to portend? Well, for local investment you can probably afford to be slow on the uptake. Remember that in the last recession stock market prices did not finally reach their six-year low until January 2012. Beware of false rallies.
It’s going to be the same story for real estate. The projects started recently will be built out and dumped on to a market in recession. Increased supply in a depressed market is not good for prices. Still, the UAE will remain in demand as a safe haven and the rental market may remain surprisingly solid, as it was in 1999-2000.
Peter Cooper is the editor of ArabianMoney.net
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Published: December 19, 2014 04:00 AM