How the pandemic could bring cash-rich Dubai to its knees

The financial heart of the UAE faces an uncertain future with the pandemic halting its trade, travel and tourism, pushing it to turn to big brother Abu Dhabi for help.

TRT World

Across the chaotic Middle East, Dubai has long been known for its riches. From luxury hotels and glittering real estate to its penchant for gold, the oil money allowed it to build almost anything people dreamed of.

But the days of lavish spending may soon be over as the deadly coronavirus has struck the city hard. The pandemic has brought its economy to a standstill, severely affecting this commercial hub, which is one among the seven Emirati states comprising the UAE.

Dubai’s economic activity is largely subservient to shipping, aviation and real estate — the three sectors are generally considered to be coronavirus hotspots. The closure of these sectors have contributed to the sharp decline of oil prices, hitting the UAE hard.

“Sectors that are likely to be most affected by the pandemic account for over half of the UAE’s total GDP (and just under half of the non-oil GDP) and an even greater share of Dubai’s GDP,” said a report prepared by Moody’s, one of the ‘big three’ credit rating agencies of the world.

The shutdown has stopped almost all commercial flights to Dubai International, one of the world’s most active airports prior to the pandemic, hurting the Emirate at a time when holiday season was around the corner.

The deadly pandemic has also forced Dubai to delay its long-planned Expo 2020, which was expected to generate essential investment and much tourism, pulling in 25 million visitors according to estimates, from its scheduled month of October to a year later, cutting much-needed revenue avenues to the Emirate.

“Dubai is the most vulnerable of the economies in the Middle East and North Africa to the economic damage from such [lockdown] measures,” Capital Economics, a leading economic research company based in Britain, reported in late April.

“We think that Dubai’s economy could contract by at least 5-6 percent this year if these measures last into the summer,” the report estimated in a dire analysis for the Emirate.

The problems for the fancy Emirati state doesn’t end there. It has also accumulated major sovereign debt, which was valued at 110 percent of its GDP in 2019, according to the International Monetary Fund (IMF), making Dubai vulnerable to a possible default.

“If debt problems do materialise, Dubai’s government is not in a position to step in given its own large debt burden,” Capital Economics researchers wrote.

According to the consultancy firm, Dubai’s financial health, whose debt-to-GDP ratios is one of the highest across the globe, is tied to “a key factor that will determine how fresh debt problems in Dubai play out is the response from neighbouring Abu Dhabi”.

Abu Dhabi is the most powerful Emirate of the federal monarchy with enormous sovereign wealth funds reaching nearly a trillion dollars, according to Capital Economics.

In the 2008-09 crisis, which brought Dubai to the brink of defaulting, heavily damaging its global image, Abu Dhabi came to the help of its little brother, bailing out much of its debt at the time.

The Emirate’s top financial official, Mohammed Ali al Shorafa, claims that “Abu Dhabi has the resources, even at these levels of crude oil prices, to continue with its planned progression” regarding its financial projects for 2020.

While Abu Dhabi might be tired of covering for the failures of its lavish brotherly competitor, the fall of Dubai could also create an existential threat for the durability of the Gulf monarchy.

“Failing to support Dubai would also raise concerns about the economic and political stability of the UAE as a whole,” wrote Capital Economics.

But this time around everything appears to be more complicated than even the 2009 crisis for both Dubai and Abu Dhabi, as the virus shutdown has been coinciding with a slump in oil markets, whose revenues comprise the biggest part of the Gulf country’s national income.

Dubai has been a falling star for some time in terms of both its residential property prices, which have declined 30 percent since 2014, and hospitality revenues, which have decreased more than 25 percent per hotel room since 2015.

“The coronavirus outbreak and the pandemic’s indirect impact on global growth and trade pose a significant shock to economic growth in the United Arab Emirates,” Moody’s report said.

The report also observed that Dubai appears to be more exposed to the economic consequences of the pandemic saying: “The negative growth and fiscal implications are most acute in Dubai, while it faces the greater risk of its government-related entities requiring financial support as a result of the deterioration in economic conditions.”

– TRT World

(This story has not been edited by Kashmir Today staff and is published from a syndicated feed.)

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