Fall of the miracle city
Edition 17. What next for the gateway to the middle-east? What does the future of transportation look like?
This is the tale of a sleepy fishing village which chanced on wealth.
The sprinkling of oil fired the imagination of the late ruler of Dubai - Sheikh Rashid Bin Saeed Al Maktoum.
My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.
Worried about oil running out in a few generations after its discovery in Dubai in 1966, the Sheikh financed one of the most breathtaking economic transformations by investing in infrastructure and making Dubai the regional hub for trade.
He successfully positioned the city as the gateway to Africa and the Middle-East, turning it into a giant petrodollar recycling hub and a leisure playground.
Mention Dubai today and one conjures the image of its futuristic skyscrapers, the glitzy malls, and the ruthless efficiency of its aviation behemoth – Emirates.
In a cruel twist of fate, the factors that made it an outsized success now threaten the very economic foundations of this miracle city.
Let’s look at the malaise affecting Dubai – one of the premier global business centres, to uncover a tale of geopolitics, debt binge, labour dependence and COVID-19.
Consider the headlines -
Multibillion-dollar Debt Crisis Looms for Dubai
A haven for money in the middle east, Dubai is losing its shine
These headlines were not written during the COVID-19 crisis. They were written in 2018.
Dubai turned from this in the 1960s
to this in the 2010s.
The transformation extracted its costs. Much of the development was fuelled by debt. Even though Dubai did not produce much oil itself, it depended on the oil-backed affluence of its neighbouring countries for its prosperity.
This is a chart of oil prices for the last 20 years
Here is a snapshot of Dubai’s GDP growth in the same period
The growth and oil prices have essentially moved in the same direction for the last 20 years.
The 2008 crisis was a major shock to oil prices. The downturn hit Dubai’s economy especially hard. So dire was the situation that Abu Dhabi – the capital of the U.A.E. (of which Dubai is a member), spent $10 billion in 2009 to bail out the city to prevent a default.
2014 was a momentous year in the history of commodity prices including that of oil. The Federal Reserve in the US after cutting interest rates close to 0 in the wake of the recession in 2008, finally started raising rates. Increasing volume of American shale oil started coming on board and the world saw an oil supply glut.
The commodity prices, including those of oil, crashed and have stayed low. Here is what has happened to the Dubai real estate prices since.
A secular decrease in the price of real estate, in line with those of oil.
Despite the cooling demand for real estate, Dubai has continued to build aggressively while binging on debt. So precipitous was the situation that (as the headline at the beginning of the article read), Dubai was staring at a real estate led debt crisis in 2019 itself.
Then COVID-19 hit
Dubai International Airport for years has been the world’s busiest for international travel. Its vast Jebel Ali Port ranks high globally for its cargo operations. The state-owned long-haul carrier Emirates flies in foreign workers and tourists alike, who buy alcohol from state-owned duty-free shops, live in housing largely built by state-linked developers and hold credit cards from state-backed banks. The wider nexus webs out into something U.S. diplomats have called ”Dubai Inc.” Much of it worked, up until the pandemic.
Here is a helpful chart summarizing major sectors of the Dubai economy.
As evident, the sectors that have propelled Dubai’s growth (retail, transport, manufacturing, real estate) have been battered by the coronavirus.
Take aviation as an example. Dubai used its geographic position deftly to become a layover hub. It’s massive investments in Emirates paid off as the airline became the emblem of the kingdom’s transformation, a global champion connecting over 80 countries globally.
COVID-19 apart from shutting international travel has also thrown the future of ‘layover hubs’ in doubt. In the short run, the most commonly accepted means of high volume travel seem to be travel bubbles – a group of countries who agree to open their borders and relax quarantine requirement for passengers within this group, travelling via direct flights.
Suddenly, the future of Emirates does not seem as bright as it did a couple of years ago. In late March, it became the first major carrier to be bailed out by the government.
Take the malls - the throbbing heart of Dubai’s state-led capitalism. They are empty and are facing questions of long term sustenance even as few of them try to stay relevant by filming drone races inside their empty concourses.
People go back
Malls will eventually open, flights will gradually get full again, however, Dubai might face a crisis which will not be easy to reverse - migrants going back home.
Oxford Economics estimates the United Arab Emirates, of which Dubai is a part, could lose 900,000 jobs -- eye-watering for a country of 9.6 million -- and see 10% of its residents uproot. Newspapers are filled with reports of Indian, Pakistani and Afghan blue-collar workers leaving on repatriation flights, but it’s the loss of higher earners that will have painful knock-on effects on an emirate geared toward continuous growth.
For decades, Dubai has thought big, building some of the world’s most expansive malls and tallest buildings. From the desert sprang neighbourhoods lined with villas designed for expat families lured by sun and turbo-boosted, tax-free salaries. But the stress was building long before 2020. Malls were busy but shoppers weren’t spending as much. Residential properties were being built but there were fewer buyers. New restaurants seemed to cannibalize business from old.
The U.A.E. and Dubai are dependent on foreign workers to an astonishing degree. For instance, this fascinating post from 2008 talks about a hidden colony of migrants of Sonpur (‘Middle-Eastern Soweto’) with deplorable living conditions. The same migrants living in conditions of open sewage would go out and build the eye-popping landmarks that now pop the glitzy skyline of the city.
The expatriates have literally built and sustained Dubai. They constitute over 80% of the total population in the U.A.E. So dominant are they in the workforce that less than 2 in every 100 workers in the private sector in Dubai, is a local.
The high cost of living, a slowing economy, and mass layoffs have hit the migrants hard. For many, the dream of Dubai has soured. It is time to leave.
“Dubai is destined to be a crossroad between East and West, and between North and South,” reads the 50-year charter put out by the government.
The city now has a monumental hill to climb to realize this vision.
In other news
Apart from the linked articles, I found the following resources helpful while researching this piece
This great animated time-lapse Dubai’s evolution.
Why are Dubai’s man-made islands are still empty or why everyone should think hard before embarking on vanity projects.
This excellent presentation by Blume (a leading early-stage Indian venture capital fund) summarizing their in-house survey which looked at people’s preferences in transportation post-COVID-19. Seems like ACs are not going to be popular in buses and people will pay a premium if service carriers can advertise the safety precautions that they are taking.
A great history of gold prices from the Visual Capitalist. The piece has more details.
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