Fear and hope

Published : Jan 01, 2010 00:00 IST

in Dubai

THE emirate of Dubai, known for its extravagant ways, has begun reinventing itself along more modest lines.

The financial storm that hit Dubai and made world markets nervous after the government-owned conglomerate Dubai World unilaterally declared that it would suspend repayment of its debt by six months had been brewing for quite some time. In fact, the default announcement on November 26 marked the beginning of the second and more virulent phase of the crisis, which initially began with the collapse of the housing market in the United States along with the drop in the global demand for luxury goods. Dubais nosedive truly began when global recession and fears that emerging markets would be badly hit generated a capital flight from the emirate. Apart from negative sentiment, investors also needed capital to make up for their losses in the U.S. When in tandem banks began to dither about offering easy loans and fears about the future began to loom large, the fall of the real estate market in Dubai became imminent. Several construction projects have now been abandoned or shelved.

The poor market confidence has been reinforced by the emirates upcoming debt liabilities. In the next three years, Dubai has to repay debts amounting to a staggering $50 billion. As much as $12-$13 billion is due next year, followed by a jaw-dropping $25 billion in 2011. With real estate as one of its core elements, Dubais economy began slumping from the second half of 2008. Since then Dubai has been resting on shaky ground, with many of its opulent real estate castles, built on weak financial foundations, ready to collapse.

The coup de grace came on November 26, when Dubai World made the announcement that it would not go ahead at least until May 2010 with the repayment of $15 billion on its $59-billion debt. The accounting and consultancy firm Deloitte had been hired to advise on restoring the conglomerate into better financial health. The announcement was made on the eve of Bakrid holidays when the government was closed and unable to react to global markets. Partly, the tremors across markets worldwide were a reminder of the fragility of the much-hyped beginning of the economic recovery after the recession. Despite the rather modest size of Dubais economy, its woes raised serious doubts about the financial viability, in general, of emerging markets and their ability to meet their cash commitments resulting from their substantial borrowings.

Where does Dubais crisis leave Indian white-collar workers? According to some estimates, around 35 per cent of the Indian workforce, which is estimated at around one million, is employed in the emirate. Sector-wise figures are hard to get. Nevertheless, it goes without saying that the jobs of those employed in the real estate sector are on the line. Similarly, many of those employed in the financial services industry, including banks and insurance, also fear for their jobs.

The hospitality sector, which employs blue- and white-collar workers, is also likely to be affected by the economic slide. However, much will depend on the tourist traffic, which will have a direct bearing on hotel occupancy rates. With disposable incomes in the West dropping, it remains to be seen whether bargain-hunting tourists from emerging markets such as India and those in South-east Asia will make a stronger impression in Dubai. Dubais slowdown is also likely to hit young professionals employed in the entertainment industry, and event management and advertising companies. However, the relative soundness of other energy-rich countries in the Gulf is likely to be a hedge against the eventuality of workers returning to India.

On the financial side, competitors and alternatives to the bruised Dubai International Financial Centre (DIFC) are already on the horizon. These include the King Abdullah Financial District in Riyadh. Abu Dhabi is also planning a financial city at Sowwah Island. Besides, Bahrain and Qatar are better positioned to offer sound financial services.

Within Dubai, not all sectors have been as badly hit as construction. Dubai continues to retain its advantage, owing to its location as a regional trading hub and a transcontinental re-export destination. This is reflected in the restructuring exercise being undertaken in Dubai World, which is being confined to the holding company, and two of its subsidiaries, the construction giants Nakheel and Limitless. On the contrary, Dubai Ports World (DPW), which has operations in 31 global destinations, and Jebel Ali Free Zone (JAFZ) both organisations intertwined with international trade have been exempted from restructuring. A recent study by the Dubai-based Gulf Research Centre (GRC) points out that unlike some of the key construction companies, DPW and JAFZ rest on sound business models and have benefited from the recovery in international freight rates since March 2009. So has the efficiently run Emirates Airlines.

Consequently, Indian professionals employed in trade and related services are not likely to be as affected as those with jobs in the construction industry.

Emerging out of Dubais current situation are some core businesses that are likely to survive and possibly grow in the future. One of them is Dubai Aluminium (DUBAL), which contributes around 7 per cent of Dubais gross domestic product (GDP). An improvement in aluminium prices has helped the company remain on the path of sustainability. The free zones such as Media City and InternetCity, which have already taken firm root, are also better positioned to survive the crisis because of their long-term tenant base. A large number of Indian professionals find employment in these free zones.

The Dubai Electricity and Water Authority (DEWA) is also likely to remain relatively unscathed. The state-owned company, which is expanding, has its debt explicitly guaranteed by the government. This should reassure the Hyderabad-based Nagarjuna Construction Company Limited (NCCL), which reportedly has a Rs.680-crore stake in DEWAs water pipeline project. About 45 per cent of the project has already been completed. However, a more definitive word on DEWAs prospects should emerge by the first quarter of 2010. On November 30, the utility appointed Citigroup and Standard Chartered Bank to arrange for a $2-billion bond issue. The response to the offering will not only have a bearing on DEWAs future but also test the markets perception of the Dubai governments explicit guarantee.

Many of the promising Dubai companies have been arranged under the Investment Corporation of Dubai. Abu Dhabi, which has estimated sovereign funds of $700 billion, is likely to come to Dubais rescue and, as a result, save some precious Indian white-collar jobs. However, the GRC study suggests that Abu Dhabi will not bail out Dubai across the board. Its intervention is likely to be selective, covering only those sectors of the economy that are likely to have a future.

For instance, on November 25, Dubai got from Abu Dhabi only $5 billion instead of the expected $10-billion second tranche of a $20-billion bond programme. Besides, attached to the transfer was apparently the condition that the proceeds of the bond would not be used for bailing out Dubai World or Nakheel. On the contrary, the bond would provide liquidity to serve Dubais strategically important projects administered by the Dubai Financial Support Fund. The DFSF was specially formed in July to steer Dubais strategic projects.

While Abu Dhabi will remain committed to supporting selective projects, it is unlikely that its backing will be unconditional. Some analysts are veering to the view that the payoffs are likely to be political rather than economic in nature. The GRC study says that Abu Dhabi could demand a strengthening of federal authority and press for control over Dubai customs. Greater centralised control over customs could allow the United Arab Emirates (UAE) to enforce with greater vigour the sanctions against Iran, as has been demanded by the U.S.; the sanctions are in line with its own tough disposition towards Iran. So far, all the individual emirates of the UAE have an established control over customs.

In the past, commentators have said that a poor level of centralisation has been visible even in the field of foreign affairs. During the course of the eight-year Iran-Iraq war in the 1980s, the emirates of Abu Dhabi, Ras Al Khaimah, Ajman and Fujairah favoured Iraq. But Dubai, Sharjah and Umm Al Quwain, home to a large Iranian expatriate population and having close commercial ties with Iran, inclined more towards Iran.

Indian professionals, now and in the future, will, therefore, have to face a situation where the centre of gravity, both political and economic, is likely to shift increasingly towards a substantially more powerful Abu Dhabi. Dubais freewheeling lifestyle could also face some tempering as Abu Dhabi begins to occupy some of the cultural space of the emirate in the future. As Abu Dhabis clout becomes stronger and Dubai begins a painful restructuring exercise, Indian professionals are bound to feel the pinch. However, Dubais slowdown and its forced transformation into a more modest and economically viable entity does not spell total gloom.

Indian white-collar workers are likely to have a choice of relocating within the UAE or to other destinations in the neighbourhood such as Saudi Arabia and Qatar, where plentiful oil or gas reserves assure a regular flow of income to the national coffers.

In short, many white-collar workers may catch the home-bound flights, but their numbers are unlikely to congest airport terminals for the time being.

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