Dubai’s resilience to the global economic cycle was vindicated during the 1998 Asian crisis, the post 9/11 decade and its role as a safe haven for offshore wealth after geopolitical traumas as varied as the collapse of the Soviet Union, civil wars in Lebanon and Iraq and the Arab Spring. This business cycle will prove no different, though the Emirates NBD domestic economic tracker suggests the first cyclical private sector contraction since 2009, led by the big chill in tourism, construction and wholesale/retail trades.
Even though oil and gas is a mere four per cent of the Dubai GDP, the emirate is the most networked, globally integrated, capital flow sensitive economy in the Gulf, with trade, financial services, aviation and property/construction at least 85 per cent of GDP. This makes it impossible for Dubai to be immune to the mood swings of Wall Street risk assets and the daisy chains of global money markets as well as banking loan growth at home.
Dubai’s stock and property markets are highly correlated to the global credit cycle, cross border trade flows, the US dollar’s strength (or weakness), oil prices and Federal government spending. All these macro metrics flashed a growth SOS to me since summer 2014, as I argued ad infinitum in this column when Emaar was Dh11 and property prices were 20 per cent higher. Then the brutal, Darwinian logic of global macro took over.
It is no longer possible to gloss over the tight money syndrome and credit squeeze in banking markets. British banks Standard Chartered, RBS, Barclays and HSBC, who once accounted for 70 per cent of cross-border banking flows into the UAE, have slashed their footprint in the region, due to devastating losses in energy/commodity loans in Europe/Asia and Basel Three capital adequacy ratio pressures. RBS has exited the UAE. Stan Chart has existed SME lending and axed hundreds of UAE based staff. Barclays laid off 150 bankers in its Emaar Square office and HSBC plans to axe 50,000 staff making it the world’s ex local bank.
As Abu Dhabi government deposits fell in 2015 due to the crash in oil prices, its flagship banks NBAD, ADCB, First Gulf and UNB were forced to reduce loan growth to preserve UAE central bank mandated loan/deposit ratio. This led to stress in the interbank market, where the three month UAE dirham rate (Eibor) is now more than double the three month Libor, the benchmark price of bank funding in the Euromarkets. The Fed insider’s revolt against Dr Yellen’s dovish policies makes a June Fed rate hike and a higher US dollar certain in 2016. This means the current credit stress in the banking system will continue, as the cost of interbank funding, trade finance, corporate loans and home mortgages rises.
The lifting of sanctions in Iran has not revived bilateral trade flows. China’s People Bank must depreciate the yuan to revive the Middle Kingdom’s economy now that the biggest credit bubble in history has gone bust. This means Asian currencies will also be under pressure (hence my short on the Singapore dollar at 1.36 for a 1.50 target!) and global air freight rates and container shipping rates will not rise. The Baltic Dry Freight index is 96 per cent below its pre-crisis peak, a victim of trade’s new Ice Age from China.
Tourism from Russia and South Africa has also been hit by the rouble’s 120 per cent and rand’s 54 per cent fall against the US dollar in the past two years. Capex cutbacks and job losses have accelerated in oil services, drilling, construction and even banking. It is not possible for office rents to rise with one million square metres of extra supply (Asteco data) adds to the existing glutted space market. Residential property prices will also continue to fall as long as property finance costs and new supply (29,000) units rise in 2016. A major rebound in black gold, is an unlikely scenario since the shale oil revolution and Saudi Arabia’s refusal to play the role of a swing producer changes the rules of the planet’s energy Great Game. So the Gulf must cope with a $400 billion deflation shock in petrocurrency revenues at a time of rising US interest rates, a slump in world trade, a China hard landing and a banking credit squeeze.
One silver lining of the post-Lehman debt shock was Abu Dhabi’s willingness to use its vast sovereign wealth assets to strengthen the financial linkages of the UAE Federation, the most successful political and social experiment in modern Arab history. Dubai’s resilience and cosmopolitan ethos will enable the city to reinvent its business model and leverage its proven formulas for success.