The Big Read Dubai

Will it be a downsized Dubai that emerges from pandemic?

The emirate’s economy is especially vulnerable, and may need a bailout from its big brother, Abu Dhabi

Simeon Kerr in Dubai and Andrew England in London 2 HOURS AGO

Dubai’s leaders headed into 2020 brimming with confidence. After four years of
tepid growth, that had fuelled questions about the durability of the Gulf trade
hub’s business model, the optimism was inspired by the emirate’s hosting of Expo
2020, which was predicted to draw 25m visitors and reassert Dubai’s position on
the international stage.

On January 29, Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s leader, said
the expo would mark the start of a 50-year phase of “achievements” for the United
Arab Emirates and “offer new hope for creating a better tomorrow”. But just as he
was inaugurating Al-Wasl plaza, at the heart of the expo site, the UAE was making
a separate announcement — a portent for the grim reality ahead — the seven-
member federation had recorded the Middle East’s first case of Covid-19.

The economic consequences of the coronavirus pandemic, coupled with the

spectacular collapse of crude prices, have wrought havoc across the oil-rich Gulf
as lockdowns strangle businesses and finance ministers cut state spending. Few in
the region are as exposed to the crisis as Dubai; the strengths that have long made
the city stand out — and put the UAE on the map — make it more vulnerable.
Once the world’s busiest international airport by passenger numbers, Dubai airport has reopened for one-way flights to allow
unemployed expatriates to return home © Christopher Pike/Bloomberg
For decades, Dubai’s success has been built on its transformation from pearl-
diving backwater into global entrepot with some of the world’s busiest ports and
airports, as well as a financial centre that hosts top international banks — the
Middle East’s version of Singapore or Hong Kong.

But today the emirate’s main economic drivers — trade, transportation, tourism,
retail and real estate — are slammed shut with the world in lockdown. Dubai has
minimal oil resources, and lacks the financial muscle of its wealthier neighbours
such as Abu Dhabi and Qatar to cushion the economic impact of Covid-19. Expo
2020, which was scheduled to open in October, has been pushed back 12 months
— joining a long list of global events that have fallen victim to the pandemic.

The global crisis has raised concerns about the emirate’s high debt burden —
which the IMF found last year “exceeds 100 per cent of Dubai gross domestic
product”, including government-related entities — and revived painful memories.
During the 2008-09 crisis, Dubai came to the brink of defaulting and was forced
to downsize and restructure distressed state entities.
It survived, and later thrived, largely thanks to $20bn in bailout loans
underpinned by Abu Dhabi, the UAE’s wealthy capital. But that crisis was
primarily contained within Dubai’s real estate sector and government-related
entities, which had gorged on debt as the city expanded.

This time the impact is broader and, in a worst-case scenario, could result in a
slimmed down version of Dubai Inc.

“There is no choice but restructurings, downsizing, mergers,” says Karen Young, a

resident scholar at the American Enterprise Institute, a think-tank. “Staff
numbers from cleaners to interior designers, accountants to general managers,
will be affected.”
The United Arab Emirates recorded its first case of Covid-19 at the end of January © Karim Sahib/AFP/Getty
Even before the crisis struck, Dubai was in a downturn. Property prices had
slumped more than 30 per cent from 2014 highs, and bankers and analysts were
speculating whether the “build it and they will come” model had run its course.

The model is now expected to come under its severest financial pressure yet and
force the emirate to re-evaluate how it operates. Government officials accept it
will not be “business as usual”.

“The global economic situation will not return to what it was,” Sami al-Qamzi,
director-general of Dubai’s economic department, told local media in April,
adding that the emirate could respond quickly to challenges. “The strategy and
economic model will be adjusted.”
The construction site of the Expo 2020, originally scheduled for October but now to be pushed back 12 months © Kamran
Jebreili/AP

Minimising the exodus

Instead of people arriving in vast numbers for Expo 2020, a mass exodus of
expatriates — who make up the bulk of Dubai’s 3.3m population — is more likely.

Foreigners account for 98 per cent of Dubai’s private sector workforce — mainly
migrant workers from south Asia — and those without jobs are unlikely to remain
for long. To ease the burden, the UAE has extended all residency visas until the
end of the year, allowing redundant expatriates to look for work or wait for flights
home to restart.

Diplomats say hundreds of thousands of foreign workers risk losing their jobs
across the UAE in the next few months. Around 260,000 Indian and Pakistani
workers have already applied for repatriation as employers try to offload staff in
sectors ranging from construction to retail and tourism.

“We’re looking at a minimum population contraction of 10 per cent for the year,”
Nasser al-Shaikh, a former head of Dubai’s department of finance, tweeted in
April.

Farhan, who has been driving taxis for eight years, used to send $300 a month to
his family in Pakistan. But last month his earnings collapsed to $60. Even with a
loan of $110 from his employer, he is borrowing from friends to survive. “Corona
has stopped everything,” he says. “So many drivers need to go home.”
The hardship extends into the white collar workforce. A fifth of the Indians
applying to return home are professionals, the Indian embassy says. “I will give it
two months and then take my family home,” says one Indian retail consultant on
unpaid leave.

Hasnain Malik of Tellimer, an emerging markets research company, says Dubai

should consider expanding access to long-term residency for expatriates, who
currently have limited rights to remain. That could boost longer-term investment
in property and businesses, as well as consumer spending.

“To return to high economic growth in a world where trade, travel and tourism
are under threat, new technology is displacing traditional business models, and
regional rivals are catching up, Dubai may have to contemplate a much more
competitive cost of living and operating,” he says.

The 2008-9 financial crisis, played out in the glare of international scrutiny, was a humbling experience for the Dubai brand ©
Kamran Jebreili/AP

Big Brother bailout

As in 2008-09, Abu Dhabi is expected to ride to Dubai’s rescue if needed. But
bankers believe any support could come with “quid pro quos”, such as asset sales
and mergers involving Dubai’s state-affiliated entities.
The two emirates have long been brotherly competitors, and Abu Dhabi's
ambitious diversification agenda has raised the capital's profile over the past 15
years. The 2009 debt crisis, however, played out in the glare of international
scrutiny, was a humbling experience for the Dubai brand.

Both emirates control their own utilities, airlines, ports and stock markets despite
being members of a small federation of 9.6m people. “There is likely to be
consolidation, it will be forced consolidation, wrapped nicely under the PR
strategy of the [UAE], and it's all a matter of time,” says a senior Gulf-based
banker.

Jihad Azour, the IMF’s regional head, notes that many government-related
entities have restructured their operations and “deleveraged significantly” in
recent years. But he says “some of them still have large levels of liabilities and
need to be monitored carefully”.

Capital Economics says some state-owned enterprises may struggle to service

their debts. It estimates that over the next three years they face a total of $21.3bn
in repayments — equal to 19.4 per cent of GDP. The consultancy, which predicts a
“major crunch point” in 2023 when another $30bn of debt matures, says the scale
of the downturn could see strains emerge sooner.

Much will depend on how long global travel and trade remain frozen. Thaddeus
Best, a sovereign risk analyst at Moody’s, says those state-affiliated entities
covered by the rating agency have adequate liquidity and moderate leverage, and
are expected to continue servicing their debts. Many, he says, should be able to
reschedule loans with local banks, if needed, while paying bondholders.

A large portion of the emirate’s outstanding bonds are held by the Investment
Corporation of Dubai, a sovereign fund which owns high-quality assets, such as
Emirates airline, and stakes in lender Emirates NBD and developer Emaar. Mr
Best says issuers, such as ICD, could tap bond markets later in the year, “when
some semblance of normality returns”.
The impact of the last crisis crash hit the real estate sector and government-related entities, which had gorged on debt as the
city expanded © Christopher Pike/Bloomberg
The government is already in talks with more than 10 lenders for five-year loans
of up to Dh2bn ($540m) each and private placement of bonds that avoid the glare
of public debt markets. “They see these as bridge financing,” says one person
briefed on the scheme, “and then [plan to] issue bonds in due course.”

Tough shutdown
The UAE stopped passenger air traffic — the lifeblood of the economy — in late
March. Dubai, a transit point between east and west, is a popular destination for
Chinese tourists — the first cases reported in January were family members who
had travelled from Wuhan, the epicentre of the outbreak in China.

More restrictive measures were introduced, with Dubai requiring residents to

obtain a police permit before leaving their homes. Covid-19 patients have been
treated for free whether or not they hold health insurance. Residents broadly
welcomed the decisive measures and the authorities’ zero tolerance approach,
including imposing more than 50,000 fines on lockdown violators.
A nationwide campaign, backed by a coronavirus testing laboratory in Abu Dhabi
that has the largest processing capacity outside China, has tested more than one
in 10 of the UAE’s population, focusing on low-income areas where migrant
workers live in cramped conditions. Carrying out the third highest number of
tests per capita in the world, the outbreak has been relatively contained. The UAE
has reported more than 17,000 cases and 185 deaths, according to Johns Hopkins
University.

Mall operators and commercial property companies have offered rent relief to tenants © Karim Sahib/AFP/Getty
Dubai eased its 24-hour curfew on the eve of Ramadan in the last week of April,
allowing residents to visit malls, which are operating at 30 per cent capacity, and
to exercise outside.

But businesses are already reeling from the shutdown and the prognosis for global
travel demand. Many companies have cut salaries by up to 75 per cent or placed
staff on leave as they seek to preserve cash, while praying for a recovery in
autumn.

Dubai International, once the world’s busiest international airport by passenger

numbers, has reopened for one-way rescue flights to allow unemployed
expatriates to return home and to bring those stranded abroad back to the
UAE. But regular services, originally planned to restart in early June, have been
pushed back — Emirates airline, Dubai’s flagship carrier, has grounded most of its
fleet and imposed salary cuts on many of its 105,000 staff. Support for the airline
threatens to be expensive given last year's operating costs were $26bn.
Contractors working for the government and private sector are being urged to find
cost cuts for existing projects of up to 30 per cent. Dubai government
departments have also frozen hiring and cut administrative and capital spending
by up to 50 per cent.

Dubai leader Sheikh Mohammed bin Rashid al-Maktoum, left, with Abu Dhabi Crown Prince Sheikh Mohamed bin Zayed al-
Nahyan © Ludovic Marin/AFP via Getty Images
“Everyone is cutting costs to preserve cash,” says one private equity fund
manager. “There is going to be a bloodbath in the SME sector — lots of failures,
and most are going to happen as we come out of the lockdown.”

Survival mode
The UAE’s financial response to the crisis has been led by the federal government,
with the central bank’s $70bn support package for lenders. The measures include
extra liquidity to allow banks to extend debt relief.

But the most vulnerable smaller companies, the bedrock of the economy, making
up half of output and providing the same in terms of jobs, say they have yet to see
the benefits of the government's rescue package. “This is like giving mascara to
the blind,” says one business owner. “Next month I will have no income, and what
happens then?”
Dubai has extended direct support to businesses, including reducing government
fees and utility bills. Mall operators and commercial property companies, as well
as the city’s financial district, have offered rent relief to tenants. But the UAE’s
direct fiscal stimulus equates to 2 per cent of GDP, compared with 5 per cent
unveiled by Bahrain and 12 per cent by Singapore, says Mr Malik.

For businesses it is now a question of survival.

“Without proper support from the government and banks, it is going to be very
difficult,” says Abdul Kader Saadi, whose Glee Hospitality consults on and
operates restaurants. He has lost management contracts and closed some
operations, while cutting salaries and encouraging staff to return home for three
months’ unpaid leave.

His business thrived during the global financial crisis a decade ago, even as many
expatriates left, with images of abandoned cars at the airport a symbol of that
period. He says today’s crisis is worse.

A magnet for millions across the Middle East, Africa and Asia, Dubai has a record
of defying its sceptics. But like Mr Saadi’s business, the commercial hub’s ability
to bounce back will depend as much on external factors as domestic.
“In Dubai, the question is which sector is not stressed? It all depends on how long
it would take for oil to recover and Covid-19 to go away,” says the Gulf-based
banker. “But don't bet against Dubai. Dubai is a survivor.”

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