x Abu Dhabi, UAEMonday 24 July 2017

Closer ties with Asia will help strengthen Mena's resistance

Focus: In early 2008, the Middle East was said to be insulated from the financial crisis. This ended up not being true. But closer ties to Asia could mean there will not be a repeat in the next crisis.

Property remains a challenge for UAE policymakers. Jeff Topping / The National
Property remains a challenge for UAE policymakers. Jeff Topping / The National

Castyour mind back to late 2007, the run-up to the first phase of the financial crisis, and the buzz-word was "insulation".

You heard it everywhere, from policymakers to economists. The theory was that the energy-rich states of the Gulf would be relatively immune from the financial troubles brewing because of the vast banks of capital they had accumulated over a decade of relatively high oil prices, and (though to a lesser extent then) by the region's importance as a trading conduit between East and West.

The "insulation" theory failed to withstand the first real onslaught of the financial hurricane in 2008. As oil prices plummeted on fears for world growth and fiscal problems became apparent in Gulf economies, financial strains at corporate level finally cracked in the Dubai World crisis of 2009.

The concept of "decoupling" - that individual economies might go their own, benign way in an overall maligned economic world - was largely discredited.

The Emirates, especially Dubai, were found to have two Achilles heels: oil prices and property values. Both went on the slide in 2008, and while oil has pulled back, property is still a millstone for UAE policymakers.

This time round, as we teeter on the brink of a global downturn again caused by western financiers (though this time in Europe, rather than the US), a similar mantra is being uttered, especially in Dubai, to ward off the possibility of Crash II.

The hopes of the UAE and other Gulf states to resist a second downturn hinge on "Asiafication". The word was recently used at a conference in Dubai to describe the increasing interdependence between the UAE and the still fast-growing economies of Asia; it is the same concept that figures so high on the priorities of such bulwarks of the Dubai economy as DP World and Emirates Airline, both of which are looking increasingly to Asia for growth as the west judders to a near-halt.

There was an illustration earlier this week of the power of "Asiafication" in Dubai. The emirate's statistics centre released revised figures for last year, showing that the real economy grew by 2.8 per cent last year, faster than earlier estimates. Wholesale and retail trade were the sectors behind the rise.

As anybody visiting the emirate's shopping malls, hotels and other tourism facilities can see, the big change is in the number of Chinese, Indian and SouthEast Asian visitors. At Jebel Ali, the number of ships coming from Asia is steadily increasing, and only 15 per cent of DP World's business is from the West.

That all bodes well for the Dubai and UAE economies. But just a couple of words of warning, before the "insulationists" start spinning their seductive yarns again.

First, the gigantic economies of China, India and (to a lesser extent) SouthEast Asia have shown a couple of signs of wobbling themselves in recent months. Inflationary pressures continue to build in China and India.Singapore, the Asian state most attuned to world trade patterns, has shown itself highly sensitive to cyclical changes.

These potential negativities should not be overestimated. China and India both have GDP growth rates (10.6 and 8 per cent respectively forecast by the IMF this year) the West would die for. If the UAE can successfully hitch itself to their wagon, it would be worth the ride.

But here lies the second caveat. A recent piece of research by HSBC's Middle East economics team shed some serious light on the "Asiafication" theory. Entitled Can Asia carry Mena?, the paper concluded that oil demand ties the Gulf and Asia much more closely than in the past, but also that, outside the energy sector, the relationship is at an early stage, and that the key player for the Middle East is not China, but India.

When oil prices are high, the Mena region runs a trade surplus with China, for example, but the high proportion of this, which is accounted for by oil, suggests a limited appetite - so far - for non-oil goods.

Meanwhile, foreign direct investment by China into the Mena region continues to run at pretty low levels, with most going, oddly, to Algeria.

For India, the story is subtly different. Demand for UAE non-oil goods - especially Dubai's - is significant in India, which is also an important re-export destination from the UAE.

The figures also show that, despite the anecdotal indicators of whole floors of the Burj Al Arab given over to Chinese tourists, far more tourists still come from India to the UAE than from China.

The conclusions are obvious: the UAE can no longer afford to be "insulationist", and can enhance its chances of getting through a future downturn by coupling up with Asia. And perhaps extend further its already strong Indian trade links.