x Abu Dhabi, UAEFriday 28 July 2017

There may well be trouble ahead, but no doomsday repeat

Arabian Gulf markets cannot exist in isolation from the rest of the emerging world, so do Dubai and other regional markets face a repeat of 2009? I do not think so.

There has been real improvement in Dubai's fundamentals, with all the indicators of activity in trade, transport and tourism heading the right way. Pawan Singh / The National
There has been real improvement in Dubai's fundamentals, with all the indicators of activity in trade, transport and tourism heading the right way. Pawan Singh / The National
I had a coffee this week with a senior American official in Dubai, welcoming the opportunity to get a sense of how the United States is thinking about the region.
I was surprised by how positive he felt about issues that I had regarded, from an American viewpoint, rather threatening.
On Syria, he thought US-led efforts to change the balance of power there would be successful, even if it meant no-fly zones and other forms of intervention short of "boots on the ground". On Iran, he thought sanctions were working and that in any case the country was becoming a peripheral player in the region.
But on one issue, he was more concerned. He was worried that global financial forces might derail the Dubai economic recovery that has been under way for a couple of years now.
He asked my opinion. I agreed with his view that there has been a real improvement in Dubai's fundamentals, with all the indicators of activity in trade, transport and tourism heading the right way.
I told him I still had some doubts about the property market, which is improving but where there are still fears about oversupply and whether we might be heading towards a new "bubble" phase.
I also repeated analysts' worries about the Dubai financial sector, where banks and other organisations are still dealing with the legacy of the 2009 crash, and where there are concerns some big liabilities are still to work their way through the system.
But overall, I said, I thought Dubai and the region had less to fear this time around from global financial instability. The still historically high oil price, the successful bout of debt issuance this year, the solid gains in 2013 on regional stock markets and the significant inward investment of Arabian Gulf states into their own economies, all these factors argued we were not back in 2009 again.
But after we parted, I began to have doubts. Had I painted too rosy a picture of Dubai's economic and financial prospects? And when somebody pointed to the current price of Dubai government bond and sukuk issues, I sent my US friend an email, tempering my previous sanguine view with a dash of realism. There could be problems ahead, I concluded.
But it's ridiculous to be flip-flopping around like a rag doll between an intrinsically "bull" view of local economic and financial questions and a fundamentally "bear" position, so which is it?
The reasoning behind the bear view is apparent: with "tapering" of US quantitative easing (QE) now official Fed policy, there are serious concerns that the principal beneficiaries of QE - emerging markets - will have the rug pulled from beneath them.
This is already happening, as witnessed by the big increases in emerging markets yields, especially in more esoteric areas such as Rwandan and Honduran debt.
The second bear fear is the credit crunch that has hit the Chinese banking sector.
This is obviously coming to a head, and the prospect of a financial crisis at the heart of the world's most dynamic economy is enough to spook even the most hardened bull.
Gulf markets cannot exist in isolation from the rest of the emerging world - that is one of the lessons of 2009 - so there will obviously be repercussions in Dubai and other regional markets.
But need it be as bad as 2009 again? I do not think so.
State treasuries have stocked up with energy revenue for the past few years and are well capitalised. Extensive infrastructure spending has been in place since 2011 and developed an unstoppable momentum. Big sovereign investors still have large amounts at their disposal to ensure inward investment continues. And regional equity markets have had such a good year that they are coming down from a historically high position.
There is more room to manoeuvre than four years ago.
Dubai has its own particular problems, as ever. There are some big repayments coming up and pressure on debt markets will reduce policymakers' flexibility in this regard. But most experts believe the emirate will get through, buoyed by economic growth.
All that said, it's apparent we're heading into a period of instability. But as my American friend would probably agree, the biggest fear is fear itself.
 
fkane@thenational.ae