A prominent local economist last week accused me of being - brace yourself - upbeat. Optimism, regular readers will recall, was a dish served seldom during the 21-months this column appeared on Thursdays. Blame it on the worst global recession since the Great Depression. And given the precarious outlook that still dogs the world's largest economies, it seems likely that optimism will remain a rare treat even now that we are meeting here at the start of the week.
The economist was referring not to a column, but rather to an article I wrote last week on forecasts that the UAE's economy would grow just 2.5 per cent this year. In a developing economy such as this one, growth of 2.5 per cent is nothing to write home about. Compared with last year, when the economy came screeching to a halt and threw thousands of passengers right out of their jobs and their cars and on to flights home, 2.5 per cent looks pretty good.
So, upbeat? That hurts. I can take light-hearted, wry or even sarcastic. But optimism in this economic environment has served largely as a smokescreen for denial and inertia. Sell upbeat some place else - we're all stocked up here. There are, as I noted last week, some big problems in the kind of growth the UAE will generate this year. Most of it will come from Abu Dhabi's Government spending a rising tide of petrodollars.
That means growth is going to be centred in Abu Dhabi, instead of being balanced across the country. And it means little growth in the private sector that governments here have been trying so hard to promote as a way of weaning the economy from its dependence on oil. Private companies, especially small and medium-size enterprises, are only going to find it harder to get credit in the wake of Dubai World's decision to restructure the debts at its companies.
In light of the shock announcement on November 25 that Dubai World would ask its creditors for a standstill, analysts say Dubai is virtually shut out of credit markets. Local banks will also be more reluctant to lend. They need to set aside more cash against the possibility of big write-offs on loans to government-controlled companies. With little credit available for the Government or its biggest companies, Dubai will not be seeing much growth, economists predict.
"They need debt and without debt that stimulus goes away," said Simon Williams, an economist at HSBC. Monica Malik at EFG-Hermes is predicting that the UAE's non-oil economy will grow only 2.2 per cent this year, slower than the overall economy. To some people's minds, though, the slower growth is not all bad. Restructuring Dubai's debts will be painful and costly, but it also stands to result in a slimmed-down property industry more in tune with the post-crisis environment.
Some executives are even venturing to be, dare I say, a wee bit optimistic about a restructured Dubai. People can afford to live and do business in Dubai again. And with the property sector tamed, Dubai's growth will now have to rely on its talents as a logistics and finance hub, they say. "Good riddance to the real estate market," said Yasar Jarrar, a partner at PricewaterhouseCoopers, "It took people's eyes off what Dubai is good at: the airport, the ports."
There is still a lot of heavy lifting that needs to be done. We're long overdue now for some kind of bad-debt agency that could buy dud loans from banks so they can start lending more freely. Word was that one would have been set up by last November. Still nothing. An important hurdle was removed last week when a Dubai court allowed Barclays to foreclose on a home loan. Without the ability to take over borrowers' collateral - their homes - if they default, bad loans are worth next to nothing.
More also needs to be done to improve the climate for investors and the companies that want to raise money from them. "We need to see improvements in governance and transparency," said Marios Maratheftis, an economist at Standard Chartered. "We need to see improvements in the capital markets so that the country can handle investment flows and allocate them into efficient enterprises." Dubai and Abu Dhabi have been selling government bonds to try to create benchmarks against which companies can sell bonds of their own.
But in the wake of Dubai World's move to restructure, the cost of borrowing in international markets is likely to remain inflated for some time. One solution is to start selling dirham-denominated bonds to tap local savings. The UAE also needs to encourage bigger and more professionally run pools of private capital by promoting the creation of pension funds and insurers. Whether the UAE needs to have the kind of big stock market to which it has aspired, however, is unclear.
Steps to merge Dubai's two exchanges will end up creating, at best, a better run, middling exchange with listing standards too high for all but the biggest firms to reach. Firms of that magnitude will be tempted, as DP World has been, to list in larger markets such as London anyway. "They need to create a small-cap market for small start-ups," said Ali Khan, the managing director at Arqaam Capital. Such an exchange would allow small companies from around the Middle East with little track record to raise the cash they need to build service-oriented businesses that tap a resource that unlike oil isn't being depleted - the region's people.