Crisis? What crisis? Reports of ‘looming’ Dubai crunch greatly exaggerated

The British media’s “silly season” has obviously arrived. Over the weekend one newspaper rustled up some six-year-old photos of dusty cars abandoned at Dubai airport and slapped a headline on it: “Another Dubai debt crunch is looming as oil slump hits the Gulf”.

Forget the cheap imagery, notice the word “looming”. In my book that implies an ominous, close threat, with more than a hint of inevitability. If something looms, it normally arrives, with bad results.

But there was nothing in the article that followed that persuaded me there was any such inevitability about a threat of 2009 proportions to the economic and financial well-being of the emirate.

That is not to say that the argument is baseless. It is true that Dubai’s economic model – as the trading and financial hub of the Arabian Gulf – works best when its neighbours are awash with oil revenues looking for an outlet, which is obviously not the case now.

It is also true that Dubai still has a relatively high level of debt in its government related enterprises (GREs), which was the source of the trouble in 2009.

The latest figures from the IMF show debt by central government and GREs significantly more than GDP, with some quite chunky maturities coming up over the next four years. The immediate crisis was solved in 2010, but the debt hasn’t gone away.

Nor can you deny that some important parts of the emirate’s cash generating machine are slowing down.

Demand from Russia – for five-star hotel rooms, upmarket property and expensive designer gear – has fallen significantly.

Chinese appetite for all things Dubai is also likely to suffer, and that could include interest in the Dubai International Financial Centre, whose growth strategy over the next decade assumes continued Asian growth.

And on top of all that, the emirate’s property market, the real dynamo of growth, has gone into reverse. Prices are falling across the board, and could be more than 20 per cent down over the year. Anywhere else, that would be called a crash.

But you can accept all those arguments, and even accept that the economic and financial challenges facing the emirate have increased, without the conclusion that another crisis like 2009 is “looming”.

Dubai’s economic and financial system has matured significantly since then. The pace of diversification has increased, and those regional and global corporations who have made Dubai their home are not likely to withdraw any time soon. There is a deeper recognition of the emirate as a commercial and trading centre.

In property a slowdown is actually a good thing, as the markets were getting back to the kind of unsustainable “bubble” territory that prevailed in 2008. If the current soft market encourages end-user buyers rather than speculators, that is also a good thing.

Oversupply should be mopped up in the expected surge ahead of Expo 2020. The absence of Russian and Chinese buyers should be compensated by increased activity from a resurgent India. That is the beauty of geographical as well as economic diversification.

But the clinching argument in my view is this: there is no Dubai World scenario out there to prick the bubble this time. The conglomerate's troubled debts last time were equal to roughly a quarter of GDP, which made them an existential threat.

In 2015, this is simply not there. Every Dubai GRE (with the minor exception of Drydocks World) has put its liabilities on a much sounder long term footing. Many have repaid billions of their liabilities, and new borrowing has been sensible and asset backed, as the UAE Central Bank requires.

The crucial criteria of credit default swaps – CDS – are historically low and have showed no flicker upwards as the oil price has fallen. This means the global markets do not share the belief that another debt crisis is looming.

The markets also learnt in 2009 that, in extremes, Dubai could count on the fraternal support of other parts of the UAE, and that has been taken to heart.

All in all, it looks as though the UK press has “loomed” prematurely.

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