Insight Dubai charged into the first decade of the new century with Abu Dhabi following at a more measured pace.
Dubai, Abu Dhabi to navigate potholes on road to progress
Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, told an audience of business leaders and government officials in early 2007 that the car he was driving had five gears, "all of them fast forward, with no reverse".
It was a good metaphor for the financial sector of Dubai, and of the wider UAE, in the first decade of the millennium. The country's economy accelerated away fast from the turn of the old century and hit top gear in 2006, as the financial and property sectors burst into an extraordinary boom phase before dropping back down the gears this year when the full effects of the world financial crisis were felt in Dubai, and to a lesser extent in Abu Dhabi.
It enters the new decade in a lower gear; slower perhaps, but one more appropriate to tackling the incline of financial recovery. For Dubai, in particular, there is a challenge ahead: how to resume top-gear growth when the emirate's twin engines - the property sector and the financial industry - are so seriously affected by the fallout from the credit crunch. Because of the federal nature of the UAE's constitution, and the interlocking relationship between its two biggest cities, Dubai's response to that challenge will inevitably affect Abu Dhabi.
A decade ago, both entered the new millennium in good health. Dubai has for a long time been a commercial centre for the lower Gulf region, and has spawned a banking and mercantile system that was essential to facilitate its role as a global trading hub. Abu Dhabi, since the 1960s, had built up the foundations of a financial infrastructure to handle the proceeds of the emirate's fast-flowing energy wealth.
Sheikh Mohammed was Crown Prince of Dubai, but was in the financial driving seat with his responsibility for economic development, and had already overseen the growth of the emirate's port and dockside facilities in the Jebel Ali Free Zone. A three-way strategy was developing in Dubai, aimed at the movement of goods, people and money. The world-class port facilities handled the first task; the rapid growth of Emirates Airline and the construction of leisure and tourist attractions such as shopping malls and luxury beach resorts addressed the second.
Burj Al Arab's official debut on the world scene on New Years' Eve 1999 made Dubai a destination of choice for well-heeled tourists from around the world. At the same time, the free zone concept was being taken a stage further by the establishment of the internet and media "cities" in Dubai. Set up as magnets for talent and investment, the free zones proved a huge success in attracting international expertise into the emirate and were a powerful magnet for foreign financial investment.
At the same time, the development of the free zones sparked the trend that was to be the abiding feature of Dubai's financial growth throughout the decade - the rapid growth of the property sector. The free zones drew in foreign expertise and capital, but the people working in them needed high-quality residential and commercial accommodation. The rapid population growth early in the decade began the boom in property values that made it profitable to turn Dubai into a huge construction site, with ever grander projects announced with stunning regularity.
In 2006, Dubai gave the property sector a huge boost by regularising the property laws that had hitherto given foreigners only limited rights to buy in selected parts of the emirate. The property boom was well and truly under way. The whole of the "New Dubai" area took off with the launch of the Marina and Jumeirah Beach Residence projects. Suddenly, the city was a 20km sprawl of development along Sheikh Zayed Road. No one knows for sure what proportion of the world's construction cranes were in the emirate, but the skyline about mid-2005 bore testimony to the growth of the property business.
This in turn sparked ambitions to expand further in the financial sector. All the capital invested and profit made in the property boom had to go somewhere, while the growing importance of the emirate as a centre for the lower Gulf region also prompted a need for a more modern, internationally oriented financial industry. These development trends came together in the launch of Dubai International Financial Centre in 2004. Intended as the Middle East's version of the City of London or New York's Wall Street, the DIFC aimed to be the pre-eminent regional marketplace for equity trading, investment banking and management, and a centre for the booming business in Islamic finance.
It had its own stock exchange, the Dubai International Financial Exchange, as well as independent regulatory and judicial authorities. Its dollar-denominated transactions were designed to complement the dirham deals of the local Dubai Financial Market and, after a shaky start, it began to pull in big international firms to its "campus" at the top of Sheikh Zayed Road. The world's investment bankers and corporate advisers were alerted to the emirate's new-found ambitions by the US$6 billion (Dh22.04bn) deal in 2006 under which Dubai bought the venerable P&O business.
The acquisition may have run into opposition in the US, but that only served to whet the appetite of foreign bankers and advisers for the emirate as a place to do business in the Middle East. Meanwhile, Abu Dhabi was undergoing its own economic and financial makeover, but at a slower, more cautious pace than Dubai's. The Abu Dhabi Stock Market (now the Abu Dhabi Securities Exchange, or ADX) was a base for local equity trading. There were ambitious plans for a new financial district in the capital contained in the strategy document unveiled in 2007 to guide the city's development until the year 2030.
Abu Dhabi's leading investment groups, such as the cash-rich Abu Dhabi Investment Authority or the seemingly hyperactive Mubadala, were publicising worldwide the fact that there was another big player in the Gulf, albeit with a more cautious, up-market strategy than Dubai. With hindsight, the warning signs began to appear in 2007, just as the rest of the world started to experience the first symptoms of seizure in the global credit system.
Dubai property prices inflated rapidly, with apartments changing hands - "flipping", as it came to be known - at an astonishing rate. By the summer of last year, a "bubble" had developed in UAE property that, all were agreed, had to burst at some time. When the global financial crisis burst on the world's financial system that summer, there was much talk that the UAE would be insulated from the consequences. With the price of oil hitting all-time records, the country had a cushion of capital resources to compensate for any global downturn.
To some degree, this was true of cash-rich Abu Dhabi, but Dubai, with few energy resources and at a different stage of the investment cycle, was always more vulnerable. Towards the end of last year and into 2009, these strains became more apparent, and Dubai had to resort to special funding backed by Abu Dhabi. The Dubai World debt "standstill" request of last month was a milestone in the UAE's financial development.
How the federation responds to this challenge will set the tone for the next decade. But it has already built an impressive financial infrastructure, regularly cited as the most popular place to do business in the Gulf. Abu Dhabi, too, is financially well placed to withstand the aftershocks of the credit crisis. The turn of the new decade gives time for pause and consolidation in the UAE's development as a global financial centre, but the momentum the country has built up appears to be unstoppable.