The United Arab Emirates (UAE) and especially Dubai have always stood for credit-driven megalomania and superficial growth myths. This myth was severely dampened when loans dried up in 2008 and Dubai was on the verge of bankruptcy. The salvation came in the form of a rapid recovery in Western countries, thanks to a lavish supply of central bank money and government aid, which quickly prompted investors to start looking for returns. But above all in the form of support from the neighbouring state of Abu Dhabi. But how long will Abu Dhabi want to play in the game?
Dubai has no oil, but many debts!
Yield, that’s what the UAE, especially Dubai, likes to promise. The calculation is very simple: If only more and more new projects with more and more credit are initiated, then independent growth will come at some point. But this growth has not yet materialized. As early as 2017, the UAE was on the brink of recession, when the rate of growth decelerated to just 0.5% within less than two years. Since then, the Emirates’ economy has been growing more slowly than, for example, that of the EU, although naturally desert-built skyscrapers and artificial giant islands suggest otherwise.
The fact that it was possible to achieve growth at all in order to be able to brand the Emirates as an economic miracle is due not only to Abu Dhabi’s oil revenues. It is also thanks to the central bank and companies that invest because everyone does. The first mentioned has tripled the UAE’s money supply since 2007 and the second invested as if there were no tomorrow. Even though the population stopped increasing its consumption long ago. Although the volume of credit extended to consumers has increased by a factor of 8 since 2008. But consumer spending in 2019 was still a good third less than in 2008. So for whom is so much invested in Dubai and the other Emirates?
Current reality in Dubai: deflation, shrinking orders, layoffs
This was the question that companies ultimately also asked themselves. In recent months, they abruptly stopped investing money. The UAE Purchasing Managers’ Index, compiled by IHS Markit, fell below 50 for the first time since data collection began in 2011. 50 is the line separating growth from recession. Another major problem is that inflation in the United Arab Emirates is now clearly in negative territory. Deflation even reached -2.5% in 2019 in some cases. In the case of deflation, it is attractive for consumers and companies alike to postpone purchases and investments into the future. This exacerbates the economic crisis and thus deflation.
And the companies apparently do not expect the situation to change in the short term. There are already layoffs in Dubai, while the number of advertised positions is falling. The volume of credit issued to the private sector is also falling. The credit contraction is exacerbating deflation. We reported back at the beginning of December that the real estate market is also already crashing. In recent years, the UAE has developed into a major hub for goods and air passengers. Dubai International Airport is the third largest in the world, the port the tenth largest. However, both aircraft movements and world trade have been thrown off course in the wake of the corona crisis. This is exacerbating the home-made problems in the UAE. Neither of these sectors is likely to provide any impetus for growth at present!
Almost only government spending generates growth in Dubai and UAE
The incipient crisis is also astonishing against the background of massively expanded government spending. The UAE will host Expo 2020 from October 20th, 2020, and is investing 7 billion US Dollars for this purpose. Provided the corona crisis is mastered by then, 25 million visitors are expected. Also in preparation for the Expo, government spending in 2019 increased by a full 17.3%! In 2020 a further increase of 2% is expected. The fact that the economy will only grow by 2.2% in 2019 with a 17.3% increase in government spending indicates that there was almost a recession in the private sector already last year. 80% of last year’s economic growth is attributable to increased government spending.
In 2008 Dubai was able to save itself with help from Abu Dhabi. At that time the economy shrank by 5.2%. In the meantime, the United Arab Emirates are threatening to slide back into recession together again. Will Abu Dhabi be ready to help its neighbor this time?