UAE - Market Situation

[kamranACA]

I must agree Sumair. I just shared an idea.

Regards,

[CFANerd]

TorontoBoy.
I slightly disagree with the notion of CONSUMPTION BASED ECONOMY. Although my analysis are not as insightful as yours and you seem to have a better grip over the fundamentals than I do. I see a pattern in Dubai economy that resembles that of US. Spend, spend, spend and go broke one day. Even if Dubai retains its foreign population it doesn't have much to offer them in return for their services. Yeah it could boost tourism, which is an INDUSTRY by definition but that won't happen until people in other countries start to have some disposable income. Dubai was just like an OASIS in desert with massive construction projects. I wonder why were they doing so much construction. Geographically there is nothing there except oil. They would rather have spent that money to develop some industry, some R&D or anything that could sustain their growth and people's jobs. I am not aware of any.
Secondly, US has still something to fall back on, let's say, BIOTECH can be one of them just for instance.
I am not a big fan of Arab countries in terms of their unjust and cruel policies toward poor foreign workers. Holding foreigners passports, not recognizing their residence status and so forth. It is an extremely hypocritical society where on one side you deny any rights to labor society, and on the other hand invest all money from oil exports or whatever lavish, stupid projects they were running to attract foreign investment, in foreign countries whom they constantly blame as being the champions of usuary and then blowing the trumpet of Islamic banking. Why haven't we seen India or China spending billions on making NEW EXOTIC ISLANDS THE STRETCH MILES FROM OCEAN LINE? I haven't heard lately any country ordering as many new BOEINGS as them. The fact is smart countries invest in their own countries in order to make infrastructure strong and to fall back on something that can sustain their growth in hard times. On the top of all these novel ideas they come up with about bringing foreign investments they invested in US treasuries from where is no hope of getting the investment back.

The party is over for everybody.

[sumairalam]

Dear CFANerd & Other members,

With reference to your last post

1) Dubai economy is not a spend, spend, spend economy, Dubai economy is based on export and re-export. Imports are usually for re-exports. 70% of the population save their earrings for remit or for future.

2)Dubai doesn't have oil and also UAE economy is not only based on oil exports. Yes oil contributes big portion towards the revenue but other sources of revenue are Gas / Minerals / security related equipments / items.

3) It is a misconception that UAE Government invest huge amount of money in Construction Projects. Foreign investors invest in the projects UAE Govt only provides them Land , and in return earn land rentals /sponsorship fees etc etc.
Ocean / Island big projects are all financed by foreign companies and buyers are also foreigners .

Government only invest in projects like Metro / Train / Roads etc. and interesting thing is that major portion of this also finance from marketing rights / other rights . The prices of land near theses projects increases and Govt also earn by rental that part of land on increased price.

4) The UAE national population is very thin , and they have sufficient to manage them for unlimited number of years. Retention of foreign population is the issue of foreigners not the UAE government but they are trying to take necessary steps so that no one will go out of the country due to the crisis.


5) There are other factors too for the growth or sustainability of any economy.
I dont want to go into details but the factors that help UAE to sustain its growth are

1) US$peg

2) Oil exports unit US$

3) Iran issue

4) Afghanistan issue

5) Saudi Arabia issue



It is correct that major parts of the world are under great economical crisis, but you have to examine each country independently, as I wrote before in my past post Construction is going on in other parts of the world like Sudan , Tanzania Brazil etc. UAE is the big exporters of construction equipments including minerals used in the industry.

The current security issues in neighboring countries also helps UAE to gain benefits from west.

One note

Surf the net & you will find the list of manufacturing units in UAE including one of the world largest RAK Ceramics.

On labour issues please re-visit the laws.




Best Regards

[Toronto_Boy]

Dear CFANerd

Each economy in this world is based on consumption spending and consumers, no matter what the size of economy is, for example Somali v/s. US economy. Can we imagine any economy or market where there are no consumers? The size and activity in economy and markets is dependent upon consumption spending by consumers. The aggregate demand of goods and services by all consumers defines size of the economy and economic activity itself. Now, the problem is, in recession, this aggregate demand of goods and services declines due to holding money and spending by consumers due to bad news and uncertainties about future. This holding back consumption spending negatively effects overall economic activity, lowers business profits, cause business closures and eventually more un-employment. With ripple effect this whole phenomena further cause more un-employment, more miseries, and more unrest. Therefore, in recession, through changes in monetary and fiscal policies, each government tries to stimulate consumption spending again to regenerate economic activity. Governments effect this aggregate demand of goods and services, in times of recession, through large government spending and tax cuts along-with supporting monetary policies.

Now, we can see that if masses of population (which are consumers of necessities and luxuries both kind of goods and services) would leave a country due to various reasons, would lower aggregate demand of goods and services in the economy, resulting more negative impact on economy as compared to economies of countries where population remains in the country even in recession times.

Problem with gulf countries (including Dubai or UAE) is, dominant portion of their population is non permanent residents. Thus, such governments do not want to spend money on projects for welfare of these foreign workers. Interesting thing is, such governments want to boost economic activity without directly spending government money on such un-owned residents, so how consumption spending and aggregate demand of goods and services would increase, is really an interesting situation. Or probably they don’t care. Their nationals and governments have enough money to maintain present lavish life style till the world economies recover again from recession and start foreign investments and tourism again in such countries.

By the way, what is wrong in “consumption based economy” and spend, spend, spend. Spending leads to economic activity and consumption is dependent upon disposable income. If people in USA have large disposable income, so they can do more consumption spending. Even human bodies get sick, so do economies in recession time (which is a kind of sickness). Just like human bodies, economies would have to bear un-easy feelings till recovery.

Regards

[sumairalam]

Absolutely agree with Toronto Boy.

[Toronto_Boy]

Dear CFANerd and sumairalam

So what I am saying here is, economies of gulf countries (including Dubai and UAE) would have double negative impacts. One, due to recession. Two, due to likely future outflow of large masses of population, if it actually happens, which is an assumption at this stage but would be an eventual result if recession and resulting layoffs continue and governments do not attempt to stop exit. Recession has minimized foreign investment, increased business closures, and unemployment. In result, people would start leaving the country, in absence of direct government spending for them, thus further causing lowering of aggregate demand of goods and services.

Irony is, either governments are reluctant for direct investment on people who worked for them for decades, or waiting for foreign help that would come after recovery, which is uncertain at this time.

We may say that it is a two way causation, and both the factors are supporting each other in negative direction, causing probably free fall of the economies.

Dear sumairalam; Though I don't know the detailed specific measures those governments are taking, but some of the steps taken by the government (which you mentioned in one of your previous posts) are more of facilitating (a kind of band-aid) in nature, rather than stimulatory to spur the activity again.

Regards

[kamranACA]

Dears,

Spending, consuming and investing are major stimulants of generation of economic activity.

The issues discussed by CFANerd included a point that construction was vigorously made and facilities were largely given for attracting foreign investment and foreigners. However, all such investment was revolving around trading, construction, housing and financial activities and there had been no development of sustainable infrastructure, main industries, downstream supporting industries and cottage industries.

This made the region dependent upon foreigners and their activities i.e. upon investors and consumers who were non-owned residents. The evacuation of such non-residents was logically supposed to create the economic gap and large un-employment. The conclusion he wanted to make was, the Duabi's economy was not self reliant and government did not bother to make it self reliant.

Regards,



KAMRAN.

[sumairalam]

Dear Respected Members,

I personally learn a lot from the opinion and thoughtful notes raised by the members especially Toronto_Boy , CFAnerd and Kamran.

The high standard of material in these posts are very well appreciated but what I request is to do not put any comment or para in your notes that based on assumption. Quality of the posts are effected with these and then it is not possible to refer it in core think tank meetings.

Simply for example in Toronto_Boy last post he wrote "due to outflow of large masses of population". This is not valid till now majority is still intact and there is no report of single way purchase of tickets or departure in masses. Further no. of cancellation of visas also do not depict such trend.

Although it is all in the air that the masses will exit after the completion of current academic year on June 28.


Further the exports are almost dead for Europe and USA especially in household sector but still the construction related exports are not effected in any cargo sector.


About Mr. Kamran last post"there had been no development of sustainable infrastructure, main industries, downstream supporting industries and cottage industries"

Every thing is there may be not many in numbers but sufficient in relation to the population or requirement.


I request the members to comment on these points

Constructions are in hold. Lay-offs in construction sector- Sharjah/Dubai only.

Banks are reluctant to provide consumer financing to construction personnel. Lay-offs in consumer departments of banks

Trading routed to Europe / USA are in hold , whereas tourism from these parts of the world are also minimal.

Due to hold of construction in dubai , related industries also showing negative growth.

People generally are in fear due to rumors , people plan to send their families back is due to fear that IF IF they loses the job they would get time to settle again in UAE.

But positive points are

Abu Dhabi is not effected. whereas Ras Al Khiaimah / Al Ain on the same pattern of Abu Dhabi.

Visitors are less from USA / UK but tourism increases from India China and gulf.

Property prices are going down but still there is only loss of profits.

Other industrial sectors are not effected at all.

Due to invasion of Russia over Georgia Ras Al khiamah suffered losses but manage to equalize it.

Apparently it looks like the Obama administration has made some slight changes over Iran issue and the geographic importance of UAE may not remain as important as before but still due to $peg UAE will remain on the priority list.

Till now the security and general environment is safe for individuals and no report of major dis-orders from any side.


Best Regards

[kamranACA]

Dears,

My post was an explanation of CFANerd's comments which I could deduce.

Further, the industry that exists at Dubai could be sufficient for its own population but when we look at the huge number of non-resident consumers it has (which you state are still there) it may not be sufficient. This results in imports which are considered the major burden on an economy. Further, industry does not only mean for population. It's the earning tool which provides for the inflow of all the foreign exchange (that is not an investment flow owned by some one else) through a value addition process applied on locally available or imported raw materials.

I wonder if Dubai has all the diversified isolated or inter-related industrial setups in textiles, silk, made ups, plastic, leather, sugar, pottery, sports, hi-tech, electronics, computers, softwares, transportation, steel, ceramics (except Ras-al-Khaima), engineering, food, edible oil, flour, jute, and other such sectors. Further, what would be the concept of downstream industries and cottage industries at Dubai, is a question to be asked. Sustainable growth comes from this whole vertically integrated industrial setup when it produces beyond the local requirements thus causing an inflow of resources to the nation from the pockets of those who are not its residents or citizens. I must remind we are talking about sustainable growth and not merely what is needed for consumption by local residents.

Some industries relating to consumer/food products or refineries or power projects that support the local consumption, do reduce the import bill but cannot provide impetus to long term growth and earning potential of foreign exchange.

The investment that has been made on hotels, plazas and buildings contributes in making Dubai dependent upon non-residents. Had these funds been invested on industrial sectors and other sustainable revenue generating infrastructure, it might have been proved far better for the future of Dubai.

These are my personal ideas which may not be precised since I am not an economist.

Regards,


KAMRAN.

[Toronto_Boy]

Dear sumairalam

I assure you that I am not a think tank, but simply a student of financial studies, so you may ignore my assumptions. The problem with economics is, we have to make assumptions to creat a contrast to understand working of any specific economy.

However, I have rephrased it and hope it would be more acceptable.

Regards

[CFANerd]

Let's solve the mystery of whats going right and what is it that's wrong. I am thankful to kamranACA for clarifying my point in detail, since I am not an expert on economic matters nor do I possess strong communication skills. Since we all are in a forum so we all respect each other's point of view and criticism ofcourse is very healthy.
Let's start with what's latest in news. I did a little research on it. Sumaira asked for specifics so Ill try my best to bring some points to table.
BBCS NEWS MARCH 17, 2009
Dubai has issued $10b to UAE to ease the liquidity crisis and the main reason behind it was "TO PAY OFF MULTI BILLION DEBT IT ACCUMULATED FOR EXPANSION PROJECTS". Interesting.
So what were those expansion projects? Doesn't it sound like overspending? It is not paying any unemployment benefits to any of its citizens, it doesn't have any defense or related research projects, and I don't remember Dubai sending any shuttle in space.
I may be wrong but doesn't it sound odd when the investment was made by foreigners mostly, as per other members' comments, and even then there is a deficit of close to $1 billion. Dubai hasn't sent any troops to Iraq for war where it could incur billions a month.

Now we turn to human efflux.
Source National Geographic.
1/8 of Dubai population is UAE citizen. Don't sound many to me.
60% of Dubai population is migrant construction workers getting paid $175 dollars a month with segregated camps outside the civilized world of Dubai. Holding passports is a major problem. Again I stress it because it shows the character of a nation with enormous wealth.
If it was foreign investment in construction projects, then I would say foreigners just walked away with their projects either halfway through or completed but no buyer. So property might be owned by Dubai's government, it might auction it (first after finding a buyer) or whatever. It also spread losses to Pakistan btw, because Pakistani investors were heavily invested in real estate in Dubai.
The biggest factor in my opinion will be consumer confidence, will it recover after such a disaster? I personally know people who invested in Dubai and lost fortunes just because of these idiotic analyst reports and overblown real estate return reports. Would people still invest in real estate in Dubai? That is still to be seen. If I was any of the sufferers I personally would never invest in Dubai. Also, what will be the next boom? I doubt it ll be real estate. So what will attract investors now. Let's dig it.
Investor left off projects might be taken over by some new entrants in the market and might help relieving banks. But again no credit for new entrants, banks have tight lending policies, we all have seen results of cheap credit.
Let's move on to where else has Dubai invested itself. 20% stake in NASDAQ since 2007. LSE another place where its at.
GCC markets down 57% in 2008.
I think further discussion will make my post longer. Will try to get update on further changes.

[CFANerd]

I want to reply to TORONTOBOY regarding CONSUMPTION BASED ECONOMY.
I should have been specific about what I actually meant by CONSUMPTION.
There is definitely nothing wrong with consumption but if it is healthy. In US case, consumption was not out of disposable income but out of credit cards. So people weren't really spending out of their paychecks or whatever but overspending due to cheap credit available to them, again buying large homes with cheap credit etc. There hasn't been any concept of saving in US atleast for the last one decade. US middle class borrowed heavily under the influence of living a great life. Never thought it would come back haunting the rest of the world.
China on the other hand, which still is in industrial era, has huge savings. It spent it's national income on infrastructure and elevating middle class. Though it still would need another 50 years to come close to US, economically.
What was all the income of US household spent on? Cars, LCD tvs, big homes? now there is no safety net. If all this income was spent on rather creating jobs and improving life of the people, all this mess wouldn't happen.
Now the standard of living will plunge further or has started already, joblessness is growing. With no jobs there will be no taxes.
Businesses will close down because people are now thinking of how to keep the food on the table for their families and a roof on their heads.
All the wealth has evaporated, closely $11 trillion. The biggest investors in US markets were individual retirees. That money is gone. Govt is running a record deficit but surprisingly still spending.
Where is all the money coming from?
Infact I am concerned about myself because if the taxes are raised beyond this point, it will the something like that saying "the straw that broke the camel's back"

Dubai has followed exactly the same pattern or its investors i would say. I think Dubai profited by taking advantage of its abusive immigration policy.But question is what was it supporting all this with? It might still have billions in funds ITSELF, but not the investors who invested there or the workers who lost their jobs. Dubai doesn't tax personal income. So if it wasn't collecting income tax from these foreign workers then obviously it was using it for below minimum wage labor. As a matter of fact illegal labor standards. So if we say that sort of population was propelling its economy, it would be a little exaggeration.
It collected rent on these projects. Loss of rent might not mean anything again, given the size of its wealth. It probably doesn't give a damn about workers living there or leaving. But overall investors confidence will definitely be shaken. Jailing for bounced check or missing car payment? This is ridiculous. PEOPLE LEAVING DUBAI ARE FLEEING DUE LOSS OF JOBS BUT RATHER A BIGGER FEAR OF GOING TO JAIL BECAUSE OF MISSED PAYMENTS AND STRICT IMMIGRATION POLICIES. One can apply this to himself or herself. If a country I reside in has some down time, will I leave after abandoning my property in such a panic? It doesn't make sense to me.
Dubai still lacks safety for investors.
There still is something brewing which isn't clear, but with all the measures exhausted and still no hope for recovery, it is suffice to say CREDIT CREDIT CONSUMPTION BASED SOCIETY is not a good way to go.

BTW last few lines that I added may be irrelevant to TORONTOBOY consumption based economy discussion.

[kamranACA]

Dears

I appreciate the posts of CFANerd and wonder if he has some loose grip on such issues, as he claims. However, the matter of 60% population of Dubai may not be so precise in my view.

When I elaborated the post of CFANerd, about the issue of where the funds have been invested at Dubai, I knew he has hit at the right spot.

Like USA, all the European countries are also credit based economies for individuals with fullest concept of availing every facility and utility regardless of how much portion of life would be spent in repaying the burden. This may be right or wrong when someone is located there. However, in all such cases the relocation results in loss of everything. In other words, zero savings.

We the residents of 3rd world are also extremely inclined to debt spending and majority of non-rural residents now carries many credit cards simultaneously where they keep on revolving their debt from one card to the other or from one debt to the other. Perhaps many of us have become best finance manager for own-selves.

Dubai's demerit crystallizes when we see that relocations tend to be substantial in comparison to other places and economies. The inhuman and unjustified treatments are now falling back.

I hope Dubai will come out of this phase but it would only happen when the recession will relieve the rest of the world as well, since Dubai is very much relying on others.

Regards,


KAMRAN.

[Toronto_Boy]

Dear CFANerd

Please accept my apologies if I could not explain in required detail, the various concepts which are being mixed-up here, due to shortage of personal resources.

We have to distinguish between consumption (spending from public) and unwise credit creation and lending (to public and businesses). Due to consumption, public demand goods and services, due to this demand factories and business produce goods and generate services. So we have a consensus here that this phenomena is healthy for economy. Now, come to un-wise credit creation and lending. This is lenders job to ensure sound lending. I ask you a personal question here, would you give your money to someone from whom you don’t expect return of loan. Off-course not. So why these lenders issued those loans un-wisely. Therefore, it is not Joe the plumber’s (who is an ordinary person from masses) to apply all concepts of economics and finance before consumption, lets say before purchasing a house. It is financial institutions job to ensure Joe the plumber is not overly leveraged before lending credit. If Joe the plumber is leveraged in ratio of 1 10 then whose fault is this. It is human nature to use whatever resources he/she has for betterment of personal life. We may say that unwise lending is a demerit of credit creation process, but it has nothing to do with phenomena of consumption itself. Same is the case in Pakistan. Even after experiencing unsecured bad debts in past, if again financial institutions in Pakistan are lending un-wise highly leveraged credit to urban dwellers, then again those financial institutions would have bad debts/ losses on their financial statements in future. Now, how those ordinary intellect people should be responsible for likely bank failure, instead of bank management who took un-wise decision or likely regulators/ auditors.

Similarly, phenomena of “Savings” in highly industrialized consumption based economies where credit is available to public is different than low income third world economies where credit in not easily available to general public. At nation's level, taxes are mandatory form of savings in economies of first group, while at individual level, investments in non-depreciable assets like houses are form of savings which becomes easy through availability of credit.

In pure economic terms, this availability of credit boost economic activity which over the period of time provide access to large number of goods and services, expand size of the economy, cause growth and development, increases wealth of a nation, and improves employment opportunities etc. Therefore, all over the world, central banks and governments, through financial and non-financial sectors, provide credit. Though this credit creation has benefits but at the same time it has some demerits also. Some of which we are experiencing these days. If it remains controlled, it is good and healthy for economy, otherwise not.

Comparing spending pattern of PUBLIC in one country (i.e. US public) with objectives of another GOVERNMENT (i.e. Chinese government) may not be a reasonable attempt. Either compare government to government or public to public. Even functioning of two economies is different. One is free market economy where government is reluctant to intervene, the other is controlled economy (by government). Even you say, China would take another 50 years to catch up with US and investing in infrastructure development. So, do you expect from US government to break already available infrastructure which it has already build up in last 50 years to follow Chinese example. Simply, they have already done it, so they are 50 years ahead. Then you further say, “What was all the income of US household spent on? Cars, LCD tvs, big homes? now there is no safety net. If all this income was spent on rather creating jobs and improving life of the people, all this mess wouldn't happen.” Come-on, what are you saying here, why are you mixing-up things, dear. I have already written enough about consumption spending on depreciable and non-depreciable products in above para. We will have to distinguish between priorities/ objectives of general public with priorities/ objectives of governments. Is it public’s objective to spend money on job creation or government’s objective? Or do you wanna say US govt. should make such policies that US public would have to stop spending on consumables, save more and then divert resources for job creation? Make sure you are talking about free market economy. By the way what is wrong if public wanna spend their income on whatever good or service they need?

Then you say, “All the wealth has evaporated, closely $11 trillion. The biggest investors in US markets were individual retirees. That money is gone. Govt is running a record deficit but surprisingly still spending. Where is all the money coming from? In-fact I am concerned about myself because if the taxes are raised beyond this point, it will the something like that saying "the straw that broke the camel's back." Dear, real wealth of a nation does not evaporate, because actually it is tangible assets and human capital which a nation has developed over a period of time (i.e. in long run). Recession is a time of restatement on financial statements, a fresh start, it may be $11 trillion, or could be $111 trillion. Real wealth of a nation would be destroyed due to depletion of natural resources, outflow of human capital (which is a case in Dubai), destruction of infrastructure (like in Afghanistan in last 30 years or after 2nd world war etc.) due to wars or floods etc. Deficits are financed through increased taxes and/ or credit creation by governments through Central Banks (and printing notes). As far as increased taxes is concerned, you should not be worry about, as it is not a policy measure in recession time, in-fact tax cuts are policy measure in recession. If US government is printing notes, rest of the countries and their public would pay for US recovery from recession and for betterment of American public, simply because almost all the countries are linked to US$ through international financial system and trade. You see, how interesting it is, conceptually speaking all humans on this earth including Muslims themselves are financing this war on terror, because we all are pegged with US$ somehow. Imagine, US govt. has printing machine (or credit creation means) of US$ and buys goods and services (for payments of all type of equipments and to NATO/Allied forces) from all over the world. What rest of the world gets in return, simply a piece of papers (i.e. US$ note), though it is generally acceptable as medium of exchange for further transactions. But the question is, what is the real cost to US govt. to do first transaction with rest of the world. Simply, cost of printing a piece of paper. You see how and why USA became super power since establishment of Bretton Woods System. This was one of the reasons of cold war to divert world resources toward one (i.e. USA) or the other country (i.e. USSR) by linking each currency with US$ or not. Oops…I am steered away. So, back to the topic.

So, don’t worry about retirees’ money, it was in the books. It would remain there through another credit creation with bailout program.

Restoration of consumers’ confidence and identification of responsibility of un-wise lending are two main issues at this time. Governments’ efforts to boost economic activity would not bring fruits if consumers’ confidence is not restored, as consumers would be holding money back rather than start spending again till they perceive uncertainties about future.

To understand the whole scenario and to handle it, we have to see it from economists view point in little deep, rather than anchors’ views.

I would talk about Dubai in another post, InshaAllah.

Dear Sumairalam; Don’t worry about your think tanks. They already know all this stuff. Probably, my posts and assumptions would not have much value for them.

Regards

[kamranACA]

Dears,

The thread was to discuss updates on UAE market situation. Although everybody is supposed to be free to share the ideas but some economic "thinktanks" (rather "tanks") are dragging the topic away. It's the sweet will of members. However, I must clear that anything discussed by me is what we generally deduce from the things happening around. I am not an economist and may not be in a position to judge the things correctly.

Regards,



KAMRAN.