Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Correction Review - 26th Jan 20
The Wuhan Wipeout – Could It Happen? - 26th Jan 20
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Dubai's Oil Boom Financial Centre Heading for Bust?

Stock-Markets / Middle East Jul 23, 2008 - 05:59 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis Article Martin Hutchinson writes: Dubai has plenty of qualities that catch an investor's eye.

  • The emirate has the world's only (self-proclaimed) 7-star hotel.
  • Dubai also is home to the biggest financial market in the Middle East, which is itself publicly quoted and trades at 25 times forecast 2008 earnings.


So, why aren't Dubai investments a screaming buy, where we should all be investing our money? After all, plenty of brokers think it's just that.

From a short-term perspective, Dubai investments haven't done too badly. The Dubai Financial Market General Index is down about 13% this year, far less than the much-hyped emerging markets of India and China, or even the United States.

But there's a possible catch.

Whereas 2006 and 2007 were good years for investors in India and superb ones for investors in China, they were lousy for investors in Dubai. The DFM General Index hit its all time high in November 2005, declined pretty steadily over the next two years, and is currently sitting about 40% below that high. Even at that depressed level, the DFM General Index is still trading at about 17 times projected earnings for this year and 3.3 times book value, so it's not cheap.

That immediately raises questions. While Dubai has little in the way of its own oil reserves, its economy rests fundamentally on its position as entrepôt for the immense oil-exporting region of the Middle East, and for the United Arab Emirates (UAE), the oil-rich federation of which Dubai is a member. Oil prices were around $60 per barrel in November 2005 when the DFM General Index was at its peak; oil is now trading in the neighborhood of $130 per barrel, even after last week's big sell-off – so why is Dubai's stock market down 40%?

It's entirely possible that Dubai isn't as solid as some of its proponents believe.

Two years ago – before the real estate crash – it might have seemed impressive that Dubai, with 0.02% of the world's population, was employing more than 10% of the world's tower construction cranes; today we know better. Dubai's rate of inflation is around 20%, and it's on the upswing, while home mortgage interest rates sit below 7%.  That means that the cost of making a home mortgage – in real terms – is negative 13%. The UAE government is considering allowing its currency, the dirham, to float upward against the dollar, but hasn't done so yet.

Dubai received more than 7 million tourists last year, with 1 million of those coming in from Great Britain (who presumably prefer the climate) – but the British government currently rates Dubai's terrorism threat at its highest level. It's not hard to imagine what a terrorist attack could do to Dubai's impressive tourist rates.

Dubai is also planning to spend $82 billion on aerospace projects to include the world's largest airport – but with a population of only 1.5 million, it will need a lot of foreign traffic to fill up such a behemoth.

The potential for that to come to pass is there, given the growing levels of investment that China and others are making in the Middle East, and because the Dubai project isn't solely focused on tourism: The airport and aerospace hub is viewed as an economic-development project. But success is far from guaranteed, and an economic downturn could make the objectives tough – if not impossible – to achieve. Indeed, should the ongoing global financial crisis eviscerate worldwide growth, Dubai's development strategy could be exposed as a bubble, not a boom.

To be sure, other small nations have engineered economic miracles. Consider, for example, the economic success of Singapore, which has a smaller land area but three times the population.

Like Dubai, Singapore has no core advantage, such as a wealth of natural resources. Nor does it have a bevy of natural tourist hot spots. And much like Dubai, Singapore's only advantage is one of geographic position. However, Singapore has an income per capita at purchasing power parity of $49,700 (eighth highest in the world) compared to the UAE's $37,300.

Singapore's growth has been built on two factors:

  • The extremely high education level of its population (relative to income at first, in the 1960s, but in absolute terms now).
  • And an obsessive focus on moving up the value chain in everything it does.

Dubai has neither advantage; it supplements its small local population with a huge underclass of immigrants (more than 80% of the population in the UAE as a whole), rather than upgrading the capabilities of its own people, and it relies on building artificial tourism in an area where (because of the unpleasant climate and relative lack of natural or historic attractions) it's possible that no natural flow of tourists would have otherwise occurred.

An economy built on construction, tourism, and a boundless flow of cash, without any special knowledge base, is one that could end up being derailed in the long run. And that long run could be more painful if it turns out that Dubai has been feeding a major construction bubble through deeply negative interest rates.

The other potential black cloud looming over the Dubai economy is that of oil prices, should $130 - $140 per barrel oil turn out to be a short-term speculative price spike.

With the Bush Administration pushing for offshore drilling and the world automobile industry devastated by consumer tastes that quickly shifted to small cars and trucks, increased supplies and decreased consumption could push oil prices down to a more reasonable level.

Assuming OPEC doesn't intercede and act to keep prices high, the right confluence of factors could potentially push oil prices back down under the Century Mark. And in a perfect world, with the right confluence of factors, oil could end up below $100 per barrel, or even as low as the $60-$80 range. And while that price level would still be well above the $10-$15 per barrel prevalent before 2002, it is far below oil's current levels.

The Middle East in general has predicated their future plans on the oil bonanza continuing in full flow for the indefinite future. Even though $60-80 oil would provide ample revenue for their citizens to enjoy an excellent living standard, their economies are not properly set up to adjust to such a lower revenue flow. If oil prices were to fall, the inevitable effect would be tighter money as interest rates return to normal levels, exacerbated by an acute cash shortage.

Dubai is looking to diversify itself away from the petro-gusher, which is one reason it is trying to position itself as a global boom intermediary, benefiting from tourism and establishing itself as a new residential destination for the world's uber-rich. It also aims to utilize its airport and aerospace ventures to fuel its real estate and global commerce aspirations.

But a key question remains: Is it still tied in so tightly to the Middle East “black gold” bonanza that it will suffer in kind should energy prices hit a deflationary downdraft?

The next few years will be telling. If its global growth aspirations get a needed lift, the tiny Gulf nation could become more than just a well-recognized name on a map; it could end up as a key stopping-off point for business executives traveling from one side of the world to the other, might one day even evolve into a commercial spaceport, and will stand as an example of a country that was able to engineer an economic makeover of massive proportions.

But should oil prices crater, Dubai's aerospace venture fail to attain take-off speed, and its vision as a tourism and residential mecca of the future turn out to be ill-conceived as I fear, the opposite extreme is possible: With a construction bubble more inflated than the 2006 Florida condo market and a monetary policy looser than the one being operated by U.S. Federal Reserve Chairman Ben S. Bernanke, Dubai could shortly resemble a jungle of half-completed skyscrapers, with 10% occupancy rates and bankrupt landlords. Its landing would be painful, and, potentially, not long delayed. It's not an investment for the risk averse.

News and Related Story Links:

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Dr. Zidan
10 Aug 08, 17:01
Dubai - the future
I am not a financial expert, yet I have been living in UAE for the last 5 years. through that period ,I kept hearing and reading articels about the so-called (bubble), nevertheless dubai always delivered.

high inflation, terriost warnings and rough east compitition, but dubai still on the right track. I guess having a keen-eyed man like sheikh Mohammad as a ruler and leader is a solid ground for sky high goals.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules