Dubai is one of the cities in the United Arab Emirates that has in recent years been highly regarded across the world as a business hub, more so due to its strategic location and growth. The city is headed by the municipality; however, it has autonomy from the rest of the emirate cities. The city is rated as one of the densely populated and the second largest of the seven emirates cities. Dubai’s economy was initially based on the oil industry but has since diversified into other industries such as tourism.
However, the city has recently grown to become one of the leading international trading centers. It has also developed and constructed ultra-modern images and high profile and luxurious hotels and sporting clubs where businessmen from all over the world refresh their minds. Its strategic position has as well attracted investors from all over the world, and as a result, Dubai is said to have a huge capital inflow as investors seek to maximize their returns from its strategic positioning.
The construction investors from India and Pakistan heavily invested their capital in Dubai as they sought to maximize on the many tourists visiting Dubai now and then. A huge population of workers from all over the world was therefore recruited to assist the constructors in their work. Dubai has therefore acted as a central magnet that pulls people from various Arabs and non-Arab countries for differentiated trading and tourist reasons.
The 2007-2008 economic recessions which hit Europe, America, and most parts of the world, never really impacted Dubai’s economy until late 2009. The recent financial crisis which has finally hit the United Arab Emirates economy not only led to the withdrawal of capital from the economy for the fear of loss but has also deteriorated the people’s living standards due to the increased unemployment. In addition, the foreign investors have opted to shift their investment from the ailing Dubai’s economy to other prospective nations around the globe where investment risks are considerably low. This paper seeks to analyze the global financial crisis in Dubai.
A brief history of the United Arab Emirates economy before the financial crisis
Dubai exhibited an excellent entrepreneurial environment in the recent past; this attracted foreign investors from various parts of the world. During the 2000-2005 periods the city registered a compounded economic growth of 13%. The increasing economic growth could be attributed to the fact that the city had opted to diversify the economy from the reliance on hydrocarbons to the flourishing trading activities in the region.
Moreover, the economy was greatly boosted by thriving real estate. The increasing oil markets have continuously given Dubai enough capital to improve and further develop its infrastructure. The continued recognition of Dubai as one of the largest global markets also greatly contributed to the economic rise in the region. Many foreign investors, therefore, chose to increasingly invest in real estate constructions. The majority of the contractors came from Asian countries such as India and Pakistan. The strategic position of Dubai made it a tourist destination and therefore the need to construct high-profile hotels and sports clubs.
The rapid expansion of Dubai real estate also led to a huge migration of people into the United Arab Emirates. The real estate expansion was mostly contributed by the gradual opening of property rights in Dubai. It was also caused by the rising housing demands as people continued to flock to the region. The real estate investment level hit $5.5 billion in the year 2006 which still is a modest level as it apportioned 3.4% of the city’s GDP.
The ratio of mortgage to GDP was also significantly low and this encouraged even more investors into the city. There was plenty of room for expansion in Dubai’s economy which attracted investors from other parts of the world. The economic potential and favorable conditions have enabled Dubai to report enormous economic growth rates in the recent past. Similar growth trends are also expected shortly as the economy continues to support investment in residential projects and implement an improved capital structure for mortgage financing companies. A growth rate of 9% is in this case expected to be achieved by the end of the year 2011.
The city also expects a compounded annual growth rate of 34% as favorable conditions continue to be maintained in the United Arab Emirates. The growth in the property market continues to be observed as demand for housing increases due to the incoming expatriates who increase day by day in the city. However, the 2006 economic panic caused the constructors to slow down their activities due to the fear of losses as the housing sector was accused of reaching its peak point.
The rumor however did not materialize as the demand for housing continued to rise despite the worry. Due to the slowed growth in real estate, Dubai experienced a huge shortage of housing in the proceeding years 2007 and 2008. The rental prices also went up considerably in those periods and it was particularly approximated to hit 60% by the year 2008. Dubai has continued to register an average growth rate of 15% during the previous decade a rate which other cities in the Arab emirates did not attain. The city has capitalized on service provisions such as rent and tariffs rather than on taxes. Dubai is therefore known to be one of the regions which operate as a tax-free zone.
The impacts of the global financial crisis on Dubai
The crisis has led to the enormous withdrawal of capital investment from the city’s economy and as a result, there is an enormous rise in the unemployment level. It is estimated that more than half of all the construction projects have been halted due to the crisis. The deterioration of the financial situations in the city has negatively impacted the expatriates who had gone there to work in the construction firms. Life has therefore become unbearable as these people can hardly meet their daily expenses without a job. The fear of loss has significantly led to a continuous withdrawal of capital by foreign investors, especially from India and Pakistan.
The investment companies are experiencing financial hardships and as a result, they have obtained financial supports from the financial institutions. A lot of debt has therefore been accumulated amongst the investment companies something which has greatly affected their financial soundness. The financial difficulties which have hit the Asian market is also been transferred to Dubai since similar investors have dominated the real estate investments. As the economy continues to worsen, herds of professionals continued to lose their jobs as the companies are unable to sustain them.
The prices of the real estate properties have continued to drop with the increased financial crises, a move which has led to huge losses to the real estate investors. Currently, the price has declined by approximately 50% and is still expected to worsen if measures are not taken to prevent the deterioration. The real estate impact has greatly hit Dubai’s economy as the city had already diversified from oil to real estate and tourism industries.
The diversification also saw massive investment into the real estate and tourism industry, consequently making the economy vulnerable to financial risks. It is also expected that the condition will continue to worsen as it seeks to correct and reverse the six years boom that Dubai had experienced in real estate properties. The ongoing crash in the real estate properties is also expected to halt most of the ongoing construction projects in the cities.
The majority of foreign investors are expected to flee from the region making the demand for properties significantly reduce. As a result, the price of properties might worsen to as much as 75% by the end of the year 2010.
There is a continued drop in share prices in the city since March 2010 a problem that has continued to raise panic to the capital investors (Dawawala, 2009, p. 15). There is also a heightened debt crisis which has greatly affected the city’s domestic and foreign investors. The combination of a significant drop in the real estate prices, increased debt crisis and the drop in the share prices continues to endanger the city’s economy shortly. The situation is also expected to deteriorate as the real estate industry was a major boost to the city’s economic progress.
The prevailing policies in Dubai and how they have impacted the current global financial crisis
The structure of the United Arab Emirates constitution expressly allowed Dubai to operate as an autonomous city. This move enabled Dubai to regulate and coordinate its economic growth without the interference of the other cities. As a result, Dubai has reported significant economic growth and more so from the 1980s to date. To improve and energize the city’s economic growth Dubai sort to establish flexible fiscal policies.
These policies enabled Dubai to finance most of the government-owned projects using internal and external sources of capital. As a result, the economy was heavily indebted something which later came to stress most of the operations after the year 2008. The financial debts have also made it hard for individual projects. The policies, therefore, enabled viable considerations of the market conditions.
The government also implemented policies that allowed foreign freehold ownership in the region. This move aimed at attracting foreign investors into the region. The policy also contributed much to the growth of real investment projects in the city. Many foreign investors have opted to venture into high-profile hotel and recreational facilities constructions to maximize their returns. The foreign freehold ownership has greatly transformed the city into a modern business and tourist center.
Dubai has also significantly minimized entry barriers for the expatriates, a move that has attracted people from other parts of the world. The free economic zone provided in Dubai has also contributed to the heightened growth in the recent past (International monetary fund, 2009, p. 44).
However, the economic policies though intended to ensure continued growth have failed in a way. It is believed that the lack of a well-regulated and coordinated economy has led to an inflated economy that is vulnerable to recession and other financial crises. For instance, the capital withdrawal by the foreign investors has almost halted the economic operations in the city, something which if priory regulated could have been prevented. The tax-free zone established in Dubai has also greatly heightened the influx of investors in the region, while the government has continued to earn and gain from the services and not from tax.
Although this policy has assisted the city to create a conducive environment for the investors, it has continued to limit government income from the investor’s operations. There was a great capital inflow in the Dubai emirate as minimal economic hindrances prevailed in the region. As a result, more money was pumped into the economy triggering inflation. The prices of goods and services have as a result gone up considerably a move which has made life difficult to the residents.
The properties and housing prices have also gone up tremendously as the constructors have been driven away by the increased debt in the region. The housing supply is therefore relatively low compared to the housing demands which continue to increase daily.
The government economic diversification move also encouraged both the domestic and foreign investors to heavily invest in real estate which is the great cause of the financial hick-up in Dubai. The accelerated rate of investment in real estate has increased the vulnerability of Dubai’s economy. Considering that the investors have greatly opted to major in real estate, price falls have a huge impact on the overall city’s economy. It is therefore efficient to say that lack of proper economic policies has led Dubai to suffer the global financial crisis.
Impacts of the global financial crisis and the domestic policies on Dubai
The global financial crisis led to a significant reduction in the oil price which consequently impacted hard on Dubai’s economy. The continued decline of oil prices in the year 2008 made it hard for the city to obtain enough amounts to furnish the infrastructural expenditure which it had already initiated. The price fall also impacted the city’s liquidity condition which pushed investors and the emirate government seeks external funding. There was also a lot of lending from the bank a condition which resulted in interbank lending.
Local banks also experienced similar financial difficulties as the borrowing level surpassed the saving level with a very huge percentage. Due to financial hardships in the market, the number of defaulters raised considerably. The majority of the borrowers are still negotiating with banks to prolong the repayment duration to effectively furnish their financial obligations. The buying and selling activities have also significantly slowed down as the majority of the visitors in Dubai have turned out to be sightseers rather than buyers. There are considerably fewer real estate projects which are currently been worked on.
This is a major sign that investors are still not comfortable with the current conditions in the city. Continued capital repatriation has been observed in the recent past as speculators shift most of their investment plans from the city. The real
The global financial crisis has led to a significant drop in real estate prices which has caused huge losses to the investors. The estate constructors have also been forced to slow down while some move out of the city as it is increasingly hard for them to operate. The continued decline in real estate properties has also prevented investors from engaging in construction projects. As a result, the supply of houses and other residential estates has remained low.
The increased demand for the estate properties has therefore led to a huge increase in rent and prices of the already existing estates in Dubai. The many semi-skilled and unskilled expatriates in the country have therefore lost their jobs as the activities of the construction sector slow down its operations. The foreign and domestic tourists also feel the impacts as the accommodation prices rise due to the financial crisis.
The domestic policies which enabled the government to acquire financial assistance from outside have led the city into a huge debt crisis. Although the move was aimed at ensuring that most of the state-owned projects do not stop, the overall effect has negatively impacted the city’s economy.
Policies adopted by Dubai to mitigate the effects of the global financial crisis
Dubai’s government-owned conglomerate has sorted a six months debt moratorium from the creditors a move which is expected to lower the amount spent in servicing debts. The repayment standstill is also expected to assist the government deal with other sensitive issues such as food and housing problems that have hit the city. The government has initiated a reduction in interest rates, a move that aims to attract more investors to the economy. To ensure that there are easy business transactions in the city, the government has created a new electronic money system that seeks to ease the time taken to transfer money between investors (Elliott & Stewart, 2009, Para. 7).
The investors from the middle-east countries are so determined to salvage the worsening situation within the Dubai emirate. It is for this reason that they efficiently retrieved the investments earlier made in the American region back to their region. The investment was bought in the year 2008 when the American economy was significantly suffering from the 2007-2008 economic recessions which affected most parts of the world. The money obtained from these operations enabled Dubai to power up the real estate boom in the city. Such a united spirit will enable Dubai not to suffer much loss due to the ongoing financial crisis in the region.
The Iraq invasion which took place in the year 2003 was expected to negatively impact Dubai’s tourism and other economic operations. But this was not the case since the insecurity did not spread into the city. Dubai’s safety throughout the period, therefore, boosted its international image which further led to the improvement of its economic progress; as well as increasing the oil trading activities (Oxford Business Group, 2009, p. 34).
Policies available to Dubai today to remedy financial and other economic policies
The proactive response of the United Arab Emirates will effectively salvage the cities from the severe economic implications in the cities. Its fiscal policy which aims at pumping a massive amount of money into the local banks will not only assist effective operations of the banks but will also ensure that there is enough money in circulation. The move will also revive the constructions and other investment projects that are currently put on halt due to some financial constraints.
Moreover, the policy will also improve the liquidity status in the various Arab emirates cities. The government moves which seek to guarantee all the local and international bank deposits will greatly improve the people’s confidence in the market. People will therefore not fear depositing their savings into these banks as they will not be exposed to any risk of loss.
The United Arab Emirates and the gulf cooperation council should also ensure that they retain a mutual relationship with other international countries from the US, Europe, and the UK. The mutual coexistence will enable Dubai and other emirate cities to benefit financially from the international communities.
The continued unity between the emirate cities particularly Dubai and Abu Dhabi guarantees each other’s safety. Since there is plenty of liquid assets in Abu Dhabi, Dubai stands to be rescued from the global financial crisis that it’s currently experiencing (the United Arab Emirates, 2007, p. 98). It is also very possible for the United Arab Emirates cities to continue having some cooperation as this can greatly rescue the overall economy of the cities.
The possible policies which Dubai should undertake to overcome the global financial crisis
Dubai should come up with a well-established labor policy that should seek to ensure that the country does not experience human capital problems. As an autonomous city, Dubai should seek to fully invest in educating its residents as that is the only way they can effectively stem out labor problems. As a country, Dubai should not major in outsourcing most of its skilled and professional workforce. This is because that can establish a huge problem if the expatriates request a huge sum of money for their services. Investment in the education system will greatly enable Dubai to be self-reliant.
An effective policy should also be put in place to enable Dubai to develop from the locally generated income. The United Arab Emirates government should design proper economic measures which should limit the cities growth to the internally available resources. The move will not only enable the cities to reduce the increased debt crisis that it’s currently having, but it will also ensure economic sustainability in the region. The economic independence will also enable Arab emirates to efficiently fund their infrastructural growth. The government-owned projects will also be prevented from being halted due to some financial difficulties.
Dubai should also ensure that it has well reliable data on the remittances it received from the overall United Arab Emirates government. Such data will not only enable the city to be aware of its current financial condition but will also enable it to detect a crisis at an early stage. The information will also enable Dubai to act on the crisis as it’s easy to determine its magnitude and effect on the overall economy. As an autonomous economy, it should seek to improve income generation mechanisms to ensure sustainability. Dubai should establish a well-balanced economy where business, real estate, and tourism form the basis (Henderson, 2006, p. 9).
Such diversification will not only spread the economic vulnerability but will also ensure that the economy does not collapse due to a decline of one economic sector. Dubai should strategize to benefit from the prevailing global economic crisis.
It should thus develop coherent employment and labor policies that will effectively mitigate the short-term impact of the financial crisis. Additionally, it should seek to institutionalize employment and integrate it into the overall social-economic development to re-energize growth and also increase the per capita income. The policymakers should also aim at introducing some macroeconomic policies while resolving the unemployment problem. For instance, it should seek to increase government expenditure since by so doing the unemployment level will be greatly reduced.
The monetary policies should be implemented to ensure easy access to credits and loans by the investors. Such financial access will greatly enable the investor to continue booting up the economy and thus quicken the recovery. Further implementation of fiscal policy should be explored to steer up the small and medium scale enterprises within the city. Such a move will ensure that the SME participate in the economic recovery and also in solving the crisis problems such as unemployment (Behrendt, Haq & Kamel, 2009, p. 28).
The authorities should therefore assist the SME to obtain financial support by either directly imposing easy lending practices in the local banks, or subsidizing them by reducing the prices of the capital goods. More labor-intensive production and construction techniques should be used to absorb the unemployed group of people in the city. This will not only provide them with some work to do but will also improve their standard of living and the overall GDP. Active labor market policies should also be encouraged to ensure that the employees are efficiently remunerated.
Proper security measures should also be established to enable the investor to feel safe while investing their money and capital into the region’s economy. This measure will also attract foreign investors who will increase capital inflow which will be used to revive the current financial crisis.
Dubai had significantly reported massive economic growth in the last decade from the year 2000. The increasing economic growth could be attributed to the fact that the city had opted to diversify the economy from the reliance on hydrocarbons to the flourishing trading activities in the region. Moreover, the economy was greatly boosted by thriving real estate. The increasing oil markets have continuously given Dubai enough capital to improve and further develop its infrastructure.
The continued recognition of Dubai as one of the largest global markets also greatly contributed to the economic rise in the region. Many foreign investors, therefore, chose to increasingly invest in real estate constructions. However, the 2006 economic panic caused the constructors to slow down their activities due to the fear of losses as the housing sector was accused of reaching its peak point. The rumor however did not materialize as the demand for housing continued to rise despite the worry. Due to the slowed growth in real estate, Dubai experienced a huge shortage of housing in the proceeding years 2007 and 2008.
The global financial crisis has hit Dubai and as a result, a huge sum of capital has been withdrawn from the city. Although Dubai was lucky not to experience the 2007-2008 economic recessions that hit the world, the city is now suffering from the measures it implemented then.
It is believed that Dubai heavily sourced financial assistance from other countries to salvage its real estate from the declining price during the recession. The crisis has led to the enormous withdrawal of capital investment from the city’s economy and as a result, there is an enormous rise in the unemployment level. It is estimated that more than half of all the construction projects have been halted due to the crisis. The deterioration of the financial situations in the city has negatively impacted the expatriates who had gone there to work in the construction firms.
The global financial crisis has led to a significant drop in real estate prices which has caused huge losses to the investors. The estate constructors have also been forced to slow down while some move out of the city as it is increasingly hard for them to operate. The continued decline in real estate properties has also prevented investors from engaging in construction projects. To improve and energize the city’s economic growth Dubai sort to establish flexible fiscal policies.
These policies enabled Dubai to finance most of the government–owned projects using internal and external sources of capital. The monetary policies should be implemented to ensure easy access to credits and loans by the investors. Such financial access will greatly enable the investor to continue booting up the economy and thus quicken the recovery. Further implementation of fiscal policy should be explored to steer up the small and medium scale enterprises within the city. Such a move will ensure that the SME participate in the economic recovery and also in solving the crisis problems such as unemployment.
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