Page last updated at 01:44 GMT, Thursday, 22 January 2009

Global woes hit Dubai's fragile economy

By Malcolm Borthwick
Editor, Middle East Business Report, BBC World, Dubai

Ships and dhows, Dubai
Mr Vail spends time at the Creek rather than working

Pajani Vail came to Dubai a year ago to work in construction.

He is on a three-year contract, but has not worked or been paid for four months.

Mr Vail spends most of his time at the Creek in the old town in Dubai, chatting to friends who are looking for jobs and watching the dhows and abras sail past.

"There are quite a few people like me," he says. "There are four or five people from my company looking for a job."

Waste of time

Mr Vail's employer is holding his passport and has told him to wait until work picks up again.

Developers have got serious cash flow problems
Colin Foreman, Middle East Economic Digest

In the meantime he sleeps on the streets or in the back of trucks.

""One day I have food, one day I don't," he says. "I have to borrow money from friends."

Having left a steady job in India to come to Dubai, Mr Vail is struggling to support his wife and two children back in Chennai.

"What is the point in being here when I have no food, no money and no job?" he asks.

"This is a waste of time. If I go back to India at least I am at home with my family."

No reserves

There are about 1.5 million Indians in the United Arab Emirates.

Dubai building
Guest labourers often leave Dubai when work dries up

Many of them are blue collar labourers, living in rooms with six to 10 fellow workers.

An increasing number are, like Pajani, victims of the credit crunch.

Unlike its neighbour Abu Dhabi, Dubai does not have vast oil and gas reserves to fall back on.

In many, ways Dubai is a victim of its own success.

It has embraced globalisation and aggressively diversified its economy into non-oil sectors such as financial services, tourism and real estate.

The Emirate is home to some of the most ambitious building projects on the planet.

It is building the world's tallest tower and has just opened the world's biggest shopping mall.

Not to mention the vast offshore islands.

Struggling developers

But now financial forces have turned, it is exposed.

The announcement by the property developer Nakheel last week that it is delaying construction of a tower that is set to soar more than a kilometre high, is a sign of the times.

The real estate market is beginning to unravel.

"Developers have got serious cash flow problems," says Colin Foreman from Middle East Economic Digest.

"Their revenue was coming from selling properties which hadn't been built yet and they were supplementing this with financing.

"Banks aren't interested in lending them money and nobody is interested in buying property, so their two avenues for finance have gone.

"At the same time they have got huge outgoings because they are building projects that they no longer have money to pay for."

Few statistics

It is easier for companies to lay off workers in Dubai than in the West because there are no unions.

Industry insiders have told the BBC that tens of thousands of workers in the construction and real estate market alone have lost their jobs over the last few months.

Some workers have just dumped their cars at the airport and fled the country, reportedly fearing for their jobs and nursing large debts.

But it is tricky to quantify the extent of the job losses here as there are few hard statistics.

Regional relocation

Some workers have moved to other countries in the region, such as Qatar, in order to find work.

Thanks to revenue generated by its vast gas reserves, Qatar's economy is booming.

It is expected to grow by 9% in 2009, which would make the Gulf state one of the fastest growing economies in the world this year.

The British project management company Mace is one of many companies in Dubai trying to relocate its employees within the region.

"The largest reaction or action has been making redundancies," says Ian Tarry, Mace's Middle East director.

"However we have managed to relocate people to other parts of the group. In some case this has involved salary reductions.

"So far Abu Dhabi has taken some of the slack and we have relocated other workers to Saudi Arabia."

Expats and tourists

The worry is that the slowdown in the construction and the real estate sector could seep into the wider economy.

Around four-fifths of Dubai's population are expats.

Fewer expats mean less demand for property.

The tourism market is also being hit. Western tourists are cutting back on spending, and occupancy rates at many of Dubai's luxury hotels are down.

The slump in the non-oil sector is part of the reason why the Egyptian investment bank EFG-Hermes says the United Arab Emirates' economy will shrink this year.

"There are two factors which have supported private consumption," according to Monica Malik, director of economic research at EFG-Hermes.

"The expats who have spent money setting up houses and buying products and secondly the tourists.

"These are both going to fall, and with greater uncertainty in the economy those who are remaining will be more careful with their spending. This shows that private consumption will fall."

Desirable slowdown

Many say a correction is long overdue, and also healthy.

Khalfan Saeed Al Kaabi runs a handful of construction related companies and is based in Abu Dhabi.

"This is normal," he says.

"We were not having enough time to plan and to design.

"Projects were being awarded and designs were done on site.

"It's good for the construction industry to reduce its speed from 200 miles an hour to 40 miles an hour, and let the momentum restart again on a different foundation."

Damaged credibility

Many companies around the world and countries in the region have bought into Dubai's success.

It is the financial, retail and tourism centre for the Gulf. But what does the future hold?

"Looking at the long term, Dubai has built itself on the promise of tomorrow and people have been buying into the dream it will deliver," according to Mr Foreman.

"It now says it will not be able to deliver these dreams, so as an investor that credibility has gone.

"Dubai needs to do a lot of work to restore that credibility over the next two years."

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