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Can Dubai Come Back?

It’s official: the recession has hit the United Arab Emirates, especially Dubai, hard. Well, maybe not official official, but I’m convinced. It’s not always easy to tell what’s happening in that part of the world. With rampant intermingling of public and private funds and  little transparency over who owns and owes what, appearances can be deceiving.

Most of the economic and business numbers have been pretty grim, but losses can easily be moved around, as in a game of three-card monte. For every big real estate project mothballed or scrubbed during the past six months, other highly visible  projects like the Dubai Metro have continued apace, and new ones are still being announced. Even as property values started to spiral downwards and huge property companies began to look distinctly wobbly towards the end of last year, there was still so much cash sloshing around and so many big projects still being announced and built the picture was pretty unclear.

Dubai, which has built a gleaming 21st-century economy based on real estate, trade, and services literally on a patch of desert sand,  has for so long defied common logic and perhaps even the laws of physics, and has produced such contradictory news since the onset of the financial crisis and recession, we might as well have tried to figure things out by reading our coffee grounds.

When the UAE government in February announced a new $100-billion project to build 80,000 new housing units in Dubai and Abu Dhabi to accommodate rising demand, there was at least a temptation to suspend disbelief. When the chairman of a large industrial group in Sharjah was quoted as saying that industrial investment was booming: “Recently, investors have been keen to invest in new areas. A lot of these investors have chosen the industrial sector, increasing the number of licenses, industrial facilities, workers, and types of industrial facilities. This clearly shows that the UAE is not exclusive to real estate investment, but is also active in all sectors,” I thought maybe there was something to his argument.

Turns out, there was not. A recent UAE-wide poll revealed that one in ten people in the country have lost their jobs over the past six months. Half of those polled said their companies have cut their workforce and a quarter say some of their co-workers have been required to take unpaid leave.

The real scale of job losses may be even higher. The UAE economy is built on an expatriate work force, ranging from Bengali and Pakistani laborers to highly-paid American and European investment bankers.  Only 20 per cent of the total population of around three million are citizens; most of the rest are there on temporary work permits. If you are a non-citizen the law requires you to leave within a month if you lose your job. This gives the UAE economy a safety valve of sorts by reducing unemployment compensation claims, but it can also have a devastating ripple effect as the job losses in the hardest-hit sectors – construction and property – produce more losses in a whole range of other industries. At the beginning of this year some analysts feared that the UAE population might drop by as much as eight per cent. Now this seems optimistic.

In what may be the most telling sign, the expected completion date of the Burj Dubai, the world’s tallest building, has been pushed back from September to December. The developer, Emaar, has been close-mouthed about the details, and is now trying to get itself taken over by Dubai Holdings, though the financial situation of Dubai Holdings is hard to read, given the proportion of its assets held in land, probably not marked to market. Other property companies are also said to be trying to merge. And Nakheel, another huge property company, which two years ago acquired the QE2 for £50 million, has temporarily abandoned plans to refurbish and reopen it as a luxury floating hotel moored to Palm Island, and now intends to send it back out on the high seas.

True, it’s not all about property. The overall UAE economy, of which oil still accounts for a third, is expected to contract by only 1% this year, and could well rebound in 2010. This may, however, signal a shift in the economic center of gravity back to Abu Dhabi, which produces about 85% of the Emirates’ oil and which has always dominated politically. But even if oil keeps the UAE economy from sinking, the boom times are unlikely to return soon. Until then, I would give investments there a fairly wide berth. Given the interlocking nature of UAE companies, when you buy a share of one  it’s hard to know who else’s hidden risks and liabilities you’re buying too.

Still, if Dubai’s recent history tells us anything it’s that anything is possible. If you can get British tourists to fly halfway around the world to lie on a beach in 120-degree heat this is literally true. So I wouldn’t entirely write off Dubai. Certainly not yet.