Oliver Cornock's Speech At Dubai Business Briefing

UAE: DubaiEconomy

Event

27 Nov 2011
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Good Afternoon – I’ve just arrived back from a trip during which I spent 4 days in Dubai, which as ever beguiles me. Lisa, the friend I was staying with, and I went shopping on Saturday and as we drove back we came to a junction. She suddenly realised that the road layout near her house had changed significantly and we were forced to heading in the opposite direction to the one we needed. The incident highlighted that far from what some of the press would have you believe, Dubai is developing and growing still, and what’s more people are still looking to move there for the various benefits it affords them – most notably standard of living.   

Dubai, they said, was a cautionary tale, a Middle Eastern Pompeii that did not pay heed to the looming clouds of economic uncertainty. Then all at once and seemingly out of nowhere, the financial crisis erupted, and those clouds rained down ash, petrifying the entire economy.

While telling these stories of doom, gloom and the great fall of Dubai, however, commentators failed to mention that – even on those ash clouds – there was a silver lining. The crisis was not, in fact, an end-all destructive force, as the media cast it. Rather, the crisis offered Dubai a chance to consolidate the massive gains it had made and I don’t think I am alone in thinking that it is in many respects a better place for that. No matter what your view there was a large dose of schadenfreude in much of the coverage. AA Gill?

Indications now are that – despite economies floundering elsewhere in Europe and North America – the emirate is regaining ground lost in recent years. According to Dubai Statistics Centre the 2010 growth rate of 2.8% beat predictions, and estimates for 2011 growth stand at 3.7%. Indeed, after weathering the unfavourable economic climate of the past few years, Dubai is brushing the dust off its shoulders and pressing onward.

What exactly is Dubai’s path though? It’s tough to pin down every element, but a key component, has – and seems likely to remain – services. Although not typically thought of as long-term growth drivers, services like banking, tourism, and financial services, along with construction and real estate fuelled Dubai’s rising star. Even as global economic forces have tried to yank that star back to Earth, services have been offering a foothold to the UAE’s second-largest emirate, and to its goals of diversification, at a time when much of the developed world is steeped in debt crisis.  

Most prominently, Tourism continues to buoy Dubai’s economy, counting for about a fifth of GDP. It’s the lynchpin of Dubai’s economic diversification: it creates jobs, brings in more visitors, which translates to more demand for construction, real estate, where admittedly a vacuum now exists, and other services such as retail, and transport.

Normally you might think the economic uncertainty and regional political unrest would have created a toxic combination for tourism in Dubai. In fact, just the opposite is occurring. Jones Lang LaSalle’s most recent Dubai City Profile describes how the emirate became a “safe haven” during recent periods of volatility. Numbers certainly have pointed to increased visitors. So far in 2011, both hotel occupancy and daily rates have shown positive signs, nudging up by 6% and 1%. Last year, guest numbers increased by 10% in the emirate’s hotels, and the average length of stay went up by more than 15%, which all bodes well.

Of course, tourism has its share of challenges – with a huge range of hotels, from two stars to the Burj Khalifa’s Armani Suites, it is hard to imagine a customer segment that isn’t already being served. And more hotels are on the way, pointing to possible oversupply. But is more supply necessarily a bad thing for an economy where tourism is so important? A larger number of hotels could lead to stiffer competition and downward pressures on prices and thereby more cheaply priced holidays for more visitors. For weaker operators, this might be painful experience, but for customers, increased competition means more value, better prices and higher standards of service. Dubai built its brand on stand-out hotels like the Burj Al-Arab, hotels that tested limits instead of following norms. To continue this legacy, a certain amount of competition is necessary. Even if these predictions of supply gluts in the hotel industry come to fruition, they will only push Dubai’s bar for service even higher.   

Air transport – another service crucial for the emirate’s economy – has also weathered the economic crisis well. This sector is particularly important for keeping a steady stream of incoming visitors and transiting passengers. Just last July – in the face of less-than-ideal economic and political conditions elsewhere, Dubai International Aiport’s passenger traffic rose by 9.7% to 4.7 million people, a monthly record. Even as many other major carriers in Europe and North America carriers are warning of shrinking margins and lower earnings for the year, Emirates has been churning out positive indicators, including higher booking levels and healthy profits. Expansion plans are underway as well. Dubai’s flagship carrier is Airbus’ biggest customer for the A380 so-called “superjumbo” jets. Investors have also shown their confidence in the airline – last June Emirates issued a $1 billion bond which was oversubscribed by six times its target value. 

In addition to handling a steady stream of visitors, the emirate has also been handling a steady stream of cargo from around the world. The emirate’s history as a trade and logistic hub reaches back to the 50s and 60s when Sheikh Rashid implemented massive infrastructure improvements, including the construction of an international airport and the dredging of the Creek. Decades later, Dubai is still investing in its logistics infrastructure – including the Jebel Ali Port and Dubai World Central/Al Maktoum International Airport. These investments are accompanied by continued growth in the segment, which has also defied the economic gloom prevailing elsewhere in the world. Traffic at Jebel Ali Port for the first nine months was 11 per cent higher – at 40.6m TEUs – than in the first nine months of 2010. Re-exports grew year-on-year by nearly 25% in January and 8% in February. The combination of exports and re-exports for the first 8 months of the year grew by 17%. That means that trade numbers are actually surpassing the heights they reached before the financial crisis.

Dubai’s financial services, like tourism and trade, have to a degree benefitted from Dubai’s “safe haven” status during the Arab Spring. Recently domestic lending has been on the up, allowing for more liquidity. This means that the capital constraints that were keeping lenders on a tight leash have loosened a bit. Of course, the sector was hit hard by the recession, and there are still obstacles ahead. The emirate has as much as $30 billion in debts coming up due before the end of 2012. But recent positive signs indicate that respectable mechanisms are in place to handle the debt.

Retail, another service powerhouse of Dubai’s economy, accounts for about a third of the emirate’s GDP according to government statistics.  Like other sectors, retail was hit hard by the downturn. Larger malls have seen stagnating occupancy rates and no new mega malls – behemoths the size of Mall of the Emirates and Dubai Mall – are set to come online for the next few years. Competition has also been heating up among retailers, meaning that some firms could be left behind. A slower pace, however, does offer advantages: about one third of Dubai retailers saw their rents go down in the last 12 months between 20 and 60%. Retail development models have had a chance to evolve as well. Developers have been tinkering with new ways to keep the sector growing, such as more localised shopping centres serving smaller areas.

While Dubai’s growing service economy has helped boost growth, other fundamentals have had time to adapt to market realities. Even the property sector has been producing positive – yes, positive – signs as of late, even in the face of adverse global conditions. Admittedly, oversupply has led to falling prices. But there is indeed a light at the end of the tunnel – a light reflecting off of the new glass facades on buildings in the emirate’s free zones where occupancy levels are growing once again. In the meantime, buyers are continuing to reap the benefits of competition among developers, allowing Dubai’s real estate markets to transform from untouchable to remarkably affordable.

Tourism, transport, trade & logistics, and retail: these have been Dubai’s strong suits. Yes, industries like aluminium have also flourished too, but it is services that have underpinned the emirate’s rise to economic prominence. This brief exploration shows that this is somewhat outside the norm. Students of economic development learn about Korea, Taiwan, and Singapore called “Asian Tigers” because of their remarkably fast paces of development. In these areas, economic development came in stages: from agriculture to light industry, from light industry to heavy industry, and finally, from heavy industry to services. Dubai, for a number of reasons, seems to be leap-frogging this gradual process, building a largely service-oriented economy straight away. Yes, that brings challenges as the events of the past few years have shown, indeed Dubai has coped well with the slings and arrows of a jealous regional press and a world happy to stick the knife in. I feel that the process of consolidation and correction are all part of making Dubai a more mature and sophisticated market and as a result a more desirable place to invest, live, work and play.