Even the Emirates aren't immune

The broad diversification of the UAE economy gives it a balance and strength that is scarce elsewhere in the Middle East.

The broad diversification of the UAE economy gives it a balance and strength that is hard to find elsewhere in the Middle East, but investors have had little to show for it lately. The stock markets - the Dubai Financial Market and the Abu Dhabi Securities Exchange - have fallen 55 per cent and 36 per cent, respectively, in the past three months, worse than any other in the region and worse than most other markets in the developed or developing world.

The financial crisis, a gathering global recession and a sudden intolerance for risk, has left investors with few places to hide, and certainly not the UAE. The end of worldwide booms in real estate, commodities and easy credit has had an particularly acute impact. The steep decline in stocks may inspire bargain hunters to try their luck, but international investment advisers suggest treating the UAE, among many other places, with caution.

The prudent approach, they say, is to wait for signs of improvement in economic, financial and market conditions to emerge at home and abroad. One such sign is stability in oil prices. The UAE is not a one-industry economy like Saudi Arabia or Kuwait, but oil still accounts for a big portion of economic output in Abu Dhabi. After a peak-to-trough drop of 59 per cent in crude, the capital could experience a meaningful slowdown unless the price snaps back swiftly.

Oil's influence on the UAE may extend beyond the direct impact of lower production revenues. Trade with more oil-dependent countries in the region may flag, and with triple-digit crude receding from memory, that second home in Dubai that some citizens of those countries considered a must-have purchase may suddenly seem dispensable. Cheaper oil is not the only factor raising doubts about property. The bill for the property boom is coming due in the UAE, as in Europe and the United States, and it is higher than many imagined.

"The same phenomenon that helped US real estate - low interest rates and a relative absence of regulation - also helped Dubai grow tremendously," said Komal Sri-Kumar, the chief global strategist at TCW, a Los Angeles fund manager. As credit and risk taking remain scarce, pushing rates higher, he said, "we tend to think of it as having an impact on the US and western Europe - but it also hits Dubai".

The credit crunch is inflicting blows not just on the property market, he noted, but also on the financial service industry, in which Dubai has developed a world-class reputation. Those segments of the economy - property, banking and insurance - dominate the Abu Dhabi and Dubai stock markets. When credit flowed freely three or four years ago, UAE stocks soared. Now that the financial system is teetering, so are stocks. Local companies that have seen share prices plummet are not all innocent bystanders in a global tragedy, either. Credit is pretty crunchy close to home.