Via Financial Times

Dubai’s leaders headed into 2020 brimming with confidence. After four years of tepid growth, that had fuelled questions about the durability of the Gulf trade hub’s business model, the optimism was inspired by the emirate’s hosting of Expo 2020, which was predicted to draw 25m visitors and reassert Dubai’s position on the international stage. 

On January 29, Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s leader, said the expo would mark the start of a 50-year phase of “achievements” for the United Arab Emirates and “offer new hope for creating a better tomorrow”. But just as he was inaugurating Al-Wasl plaza, at the heart of the expo site, the UAE was making a separate announcement — a portent for the grim reality ahead — the seven-member federation had recorded the Middle East’s first case of Covid-19.

The economic consequences of the coronavirus pandemic, coupled with the spectacular collapse of crude prices, have wrought havoc across the oil-rich Gulf as lockdowns strangle businesses and finance ministers cut state spending. Few in the region are as exposed to the crisis as Dubai; the strengths that have long made the city stand out — and put the UAE on the map — make it more vulnerable. 

Once the world’s busiest international airport by passenger numbers, Dubai airport has reopened for one-way flights to allow unemployed expatriates to return home © Christopher Pike/Bloomberg

For decades, Dubai’s success has been built on its transformation from pearl-diving backwater into global entrepot with some of the world’s busiest ports and airports, as well as a financial centre that hosts top international banks — the Middle East’s version of Singapore or Hong Kong. 

But today the emirate’s main economic drivers — trade, transportation, tourism, retail and real estate — are slammed shut with the world in lockdown. Dubai has minimal oil resources, and lacks the financial muscle of its wealthier neighbours such as Abu Dhabi and Qatar to cushion the economic impact of Covid-19. Expo 2020, which was scheduled to open in October, has been pushed back 12 months — joining a long list of global events that have fallen victim to the pandemic. 

The global crisis has raised concerns about the emirate’s high debt burden — which the IMF found last year “exceeds 100 per cent of Dubai gross domestic product”, including government-related entities — and revived painful memories. During the 2008-09 crisis, Dubai came to the brink of defaulting and was forced to downsize and restructure distressed state entities. 

Treemap showing Dubai’s debt is concentrated in sectors exposed to coronavirus impact

It survived, and later thrived, largely thanks to $20bn in bailout loans underpinned by Abu Dhabi, the UAE’s wealthy capital. But that crisis was primarily contained within Dubai’s real estate sector and government-related entities, which had gorged on debt as the city expanded. 

This time the impact is broader and, in a worst-case scenario, could result in a slimmed down version of Dubai Inc. 

“There is no choice but restructurings, downsizing, mergers,” says Karen Young, a resident scholar at the American Enterprise Institute, a think-tank. “Staff numbers from cleaners to interior designers, accountants to general managers, will be affected.”

The United Arab Emirates recorded its first case of Covid-19 at the end of January  © Karim Sahib/AFP/Getty

Even before the crisis struck, Dubai was in a downturn. Property prices had slumped more than 30 per cent from 2014 highs, and bankers and analysts were speculating whether the “build it and they will come” model had run its course. 

The model is now expected to come under its severest financial pressure yet and force the emirate to re-evaluate how it operates. Government officials accept it will not be “business as usual”.

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“The global economic situation will not return to what it was,” Sami al-Qamzi, director-general of Dubai’s economic department, told local media in April, adding that the emirate could respond quickly to challenges. “The strategy and economic model will be adjusted.”

The construction site of the Expo 2020, originally scheduled for October but now to be pushed back 12 months © Kamran Jebreili/AP

Minimising the exodus

Instead of people arriving in vast numbers for Expo 2020, a mass exodus of expatriates — who make up the bulk of Dubai’s 3.3m population — is more likely.

Foreigners account for 98 per cent of Dubai’s private sector workforce — mainly migrant workers from south Asia — and those without jobs are unlikely to remain for long. To ease the burden, the UAE has extended all residency visas until the end of the year, allowing redundant expatriates to look for work or wait for flights home to restart.

Diplomats say hundreds of thousands of foreign workers risk losing their jobs across the UAE in the next few months. Around 260,000 Indian and Pakistani workers have already applied for repatriation as employers try to offload staff in sectors ranging from construction to retail and tourism. 

“We’re looking at a minimum population contraction of 10 per cent for the year,” Nasser al-Shaikh, a former head of Dubai’s department of finance, tweeted in April.

Farhan, who has been driving taxis for eight years, used to send $300 a month to his family in Pakistan. But last month his earnings collapsed to $60. Even with a loan of $110 from his employer, he is borrowing from friends to survive. “Corona has stopped everything,” he says. “So many drivers need to go home.”

The hardship extends into the white collar workforce. A fifth of the Indians applying to return home are professionals, the Indian embassy says. “I will give it two months and then take my family home,” says one Indian retail consultant on unpaid leave.

Hasnain Malik of Tellimer, an emerging markets research company, says Dubai should consider expanding access to long-term residency for expatriates, who currently have limited rights to remain. That could boost longer-term investment in property and businesses, as well as consumer spending.

“To return to high economic growth in a world where trade, travel and tourism are under threat, new technology is displacing traditional business models, and regional rivals are catching up, Dubai may have to contemplate a much more competitive cost of living and operating,” he says. 

The 2008-9 financial crisis, played out in the glare of international scrutiny, was a humbling experience for the Dubai brand  © Kamran Jebreili/AP

Big Brother bailout

As in 2008-09, Abu Dhabi is expected to ride to Dubai’s rescue if needed. But bankers believe any support could come with “quid pro quos”, such as asset sales and mergers involving Dubai’s state-affiliated entities. 

The two emirates have long been brotherly competitors, and Abu Dhabi’s ambitious diversification agenda has raised the capital’s profile over the past 15 years. The 2009 debt crisis, however, played out in the glare of international scrutiny, was a humbling experience for the Dubai brand.

Both emirates control their own utilities, airlines, ports and stock markets despite being members of a small federation of 9.6m people. “There is likely to be consolidation, it will be forced consolidation, wrapped nicely under the PR strategy of the [UAE], and it’s all a matter of time,” says a senior Gulf-based banker. 

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Jihad Azour, the IMF’s regional head, notes that many government-related entities have restructured their operations and “deleveraged significantly” in recent years. But he says “some of them still have large levels of liabilities and need to be monitored carefully”.

Capital Economics says some state-owned enterprises may struggle to service their debts. It estimates that over the next three years they face a total of $21.3bn in repayments — equal to 19.4 per cent of GDP. The consultancy, which predicts a “major crunch point” in 2023 when another $30bn of debt matures, says the scale of the downturn could see strains emerge sooner.

Much will depend on how long global travel and trade remain frozen. Thaddeus Best, a sovereign risk analyst at Moody’s, says those state-affiliated entities covered by the rating agency have adequate liquidity and moderate leverage, and are expected to continue servicing their debts. Many, he says, should be able to reschedule loans with local banks, if needed, while paying bondholders.

A large portion of the emirate’s outstanding bonds are held by the Investment Corporation of Dubai, a sovereign fund which owns high-quality assets, such as Emirates airline, and stakes in lender Emirates NBD and developer Emaar. Mr Best says issuers, such as ICD, could tap bond markets later in the year, “when some semblance of normality returns”.

The impact of the last crisis crash hit the real estate sector and government-related entities, which had gorged on debt as the city expanded  © Christopher Pike/Bloomberg

The government is already in talks with more than 10 lenders for five-year loans of up to Dh2bn ($540m) each and private placement of bonds that avoid the glare of public debt markets. “They see these as bridge financing,” says one person briefed on the scheme, “and then [plan to] issue bonds in due course.”

Tough shutdown

The UAE stopped passenger air traffic — the lifeblood of the economy — in late March. Dubai, a transit point between east and west, is a popular destination for Chinese tourists — the first cases reported in January were family members who had travelled from Wuhan, the epicentre of the outbreak in China. 

More restrictive measures were introduced, with Dubai requiring residents to obtain a police permit before leaving their homes. Covid-19 patients have been treated for free whether or not they hold health insurance. Residents broadly welcomed the decisive measures and the authorities’ zero tolerance approach, including imposing more than 50,000 fines on lockdown violators.

A nationwide campaign, backed by a coronavirus testing laboratory in Abu Dhabi that has the largest processing capacity outside China, has tested more than one in 10 of the UAE’s population, focusing on low-income areas where migrant workers live in cramped conditions. Carrying out the third highest number of tests per capita in the world, the outbreak has been relatively contained. The UAE has reported more than 17,000 cases and 185 deaths, according to Johns Hopkins University.

Mall operators and commercial property companies have offered rent relief to tenants © Karim Sahib/AFP/Getty

Dubai eased its 24-hour curfew on the eve of Ramadan in the last week of April, allowing residents to visit malls, which are operating at 30 per cent capacity, and to exercise outside. 

But businesses are already reeling from the shutdown and the prognosis for global travel demand. Many companies have cut salaries by up to 75 per cent or placed staff on leave as they seek to preserve cash, while praying for a recovery in autumn.

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Dubai International, once the world’s busiest international airport by passenger numbers, has reopened for one-way rescue flights to allow unemployed expatriates to return home and to bring those stranded abroad back to the UAE. But regular services, originally planned to restart in early June, have been pushed back — Emirates airline, Dubai’s flagship carrier, has grounded most of its fleet and imposed salary cuts on many of its 105,000 staff. Support for the airline threatens to be expensive given last year’s operating costs were $26bn. 

Contractors working for the government and private sector are being urged to find cost cuts for existing projects of up to 30 per cent. Dubai government departments have also frozen hiring and cut administrative and capital spending by up to 50 per cent. 

Dubai leader Sheikh Mohammed bin Rashid al-Maktoum, left, with Abu Dhabi Crown Prince Sheikh Mohamed bin Zayed al-Nahyan  © Ludovic Marin/AFP via Getty Images

“Everyone is cutting costs to preserve cash,” says one private equity fund manager. “There is going to be a bloodbath in the SME sector — lots of failures, and most are going to happen as we come out of the lockdown.”

Survival mode

The UAE’s financial response to the crisis has been led by the federal government, with the central bank’s $70bn support package for lenders. The measures include extra liquidity to allow banks to extend debt relief. 

But the most vulnerable smaller companies, the bedrock of the economy, making up half of output and providing the same in terms of jobs, say they have yet to see the benefits of the government’s rescue package. “This is like giving mascara to the blind,” says one business owner. “Next month I will have no income, and what happens then?”

Chart showing Dubai’s debt in sectors most exposed to Covid-19 adds up to a third of GDP 

Dubai has extended direct support to businesses, including reducing government fees and utility bills. Mall operators and commercial property companies, as well as the city’s financial district, have offered rent relief to tenants. But the UAE’s direct fiscal stimulus equates to 2 per cent of GDP, compared with 5 per cent unveiled by Bahrain and 12 per cent by Singapore, says Mr Malik. 

For businesses it is now a question of survival. 

“Without proper support from the government and banks, it is going to be very difficult,” says Abdul Kader Saadi, whose Glee Hospitality consults on and operates restaurants. He has lost management contracts and closed some operations, while cutting salaries and encouraging staff to return home for three months’ unpaid leave.

His business thrived during the global financial crisis a decade ago, even as many expatriates left, with images of abandoned cars at the airport a symbol of that period. He says today’s crisis is worse.

A magnet for millions across the Middle East, Africa and Asia, Dubai has a record of defying its sceptics. But like Mr Saadi’s business, the commercial hub’s ability to bounce back will depend as much on external factors as domestic. 

“In Dubai, the question is which sector is not stressed? It all depends on how long it would take for oil to recover and Covid-19 to go away,” says the Gulf-based banker. “But don’t bet against Dubai. Dubai is a survivor.”