Learning the Lessons of Boom and Bust in the UAE
By Angela Sanders Monday, August 19, 2013, 03:38 AM EDT
Citizens of both the United States and the United Arab Emirates (UAE) in the Persian Gulf share much in common especially when it comes to real estate. For optimism has been growing steadily in both countries over the last few months as the world economy finally begins to emerge from the financial crisis which began criss-crossing the globe some five years ago, wreaking havoc on the income levels and well-being of hundreds of millions of people.
So have we learned lessons from it all? On an individual level the answer would surely be an emphatic yes. The idea that somehow cheap home loans in Dubai, Washington or anywhere else for that matter is the route to prosperity, even if you can't afford the repayments, has been well and truly scotched. We all know the consequences of such folly.
Now pragmatism has replaced financial naïvety, with many of us realising painfully that job security nowadays is little more than a myth. The only sure bulwark against the vagaries of the globally-connected economy is the level of savings we can muster, whether that be a little or a lot. Suddenly, saving for a rainy day has taken on a whole new understanding.
Whether lessons have been learned or not is not quite so clear cut away from the individual experience. Glitzy, glamorous Dubai, the largest city in the UAE, was hit particularly hard in the wake of the financial crisis, evidenced by the number of half-finished construction projects which seemed to litter the landscape. So could it all happen again? Could boom and bust rear its speculative head once more in Dubai?
Recent pronouncements from the International Monetary Fund (IMF) would appear to indicate that it might if left unchecked. Key, says the IMF, is for the UAE government to enact policies to strengthen the economy's resilience and mitigate the risk of entering a renewed boom-bust cycle.
The IMF says, “The pace of recovery in some segments of the real estate market and a number of announcements since late 2012 of new mega projects in real estate and tourism warrant a cautious approach to policy making.”
The comment is in part an oblique reference to Government-Related Entities (GRE), a vehicle used by governments across the world to drive and finance major – often infrastructural – projects. Dubai has a number of these, including some which got into difficulties following the boom and bust of 2009 and which had to be restructured as a consequence . Now these debts are due to be called in over the next few years.
The IMF adds, “Close oversight of the GREs will be essential to prevent a renewed cycle of risk-taking. Dubai's GREs and banks are increasingly regaining access to external financing in an environment of high global liquidity and search for yield. Renewed large-scale external and domestic borrowing to finance ambitious real estate and tourism projects should be pre-empted to avoid setting off a new boom-bust cycle. Continued close oversight of GREs by the Dubai Supreme Fiscal Committee will be essential, and should be strengthened by developing adequate mechanisms for prioritizing and sequencing major projects, and for assessing the quality of planned spending.”
It seems even the IMF is unsure whether all of the important lessons have yet been learned. In truth, only time will tell.
Read more about what the IMF is saying here.