Report blames world trade trends for Dubai's downturn

Assessment finds emirate's economy was essentially sound

Dubai's financial slowdown should be treated as a "special case" caused by the downturn in world trade and had nothing to do with the intrinsic productive capacity of the emirate's economy, the UAE economic report says. Sultan al Mansouri, the Minister of Economy, said the UAE Government had no plans for further involvement in either Dubai World or any capital reorganisation at Dubai Holding after intervening through the allocation of funding to the Dubai Financial Support Fund and other measures to improve banking liquidity.

"Dubai Holding's recent decision [to postpone repayment on some of its debt] is a normal decision and there should be no overreaction by the media as there was with Dubai World," Mr al Mansouri said. "There is no involvement from the UAE economics ministry in Dubai Holding." According to the economic report: "The economic development plan of Dubai that began in 2005 and was outlined in the Dubai Strategic Plan 2015 was clearly aware of the fact that since much of the debt had relatively short maturities (3-5 years), and cash flows from property development would fully accrue with a longer time-horizon (because it takes considerable time to complete building structures), the risk from the maturity mismatch was always present."

The global financial crisis accelerated the mismatch by depressing property values and drying up liquidity. "Severe capital outflows were caused by reductions in foreign direct investments," the report says. It also explains that the slowdown in Dubai property values was caused by what economists call "Dutch disease" - an imbalance caused by a sudden inflationary trend in a country's economy. After 2000, the emirate's creation of a tax-free and business-friendly environment attracted large capital inflows that caused an inflationary spiral in wages, credit and property prices that was halted by the global financial crisis of 2008.

"The case of Dubai is 'special' also because very large investments have been made in its soft infrastructure, in both industry and government, which will have highly positive effects on the long-run development of the emirate," the report says. "When economic commentators speak of productivity, they normally imply labour productivity. But labour productivity also depends on the amount of capital that is 'mixed' with labour, on his or her level of education, on his or her health, and on many other factors which influence the overall productivity of an economy - what is known as total factor productivity.

"But perhaps the biggest improvement in the overall productivity of the UAE in general, and specifically in Dubai, is the high efficiency of Dubai government agencies and departments which adopt first-best policies and international best practices ?," the report says. When these factors are recognised, it will position Dubai as one of the "most competitive cities in the long run", the report concludes.