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Dubai During COVID-19: Its Success May Be Its Downfall

posted on: Aug 6, 2020

Dubai During COVID-19: Its Success May Be Its Downfall
Dubai’s soaring skyline

By: Noah Robertson/Arab America Contributing Writer

The United Arab Emirates (UAE) is a group of seven emirates established in 1971 with each emirate having its own laws, governing body, internal affairs, and control over its economy. The group of emirates is governed by a Supreme Council and Federal National Council with members from each emirate. That decides necessary federal laws and coordinates the shared parts of the federation. The seven emirates are as follows: Abu Dhabi, Dubai, Sharjah, Ras al Khaimah, Ajman, Umm Al Quwain and Fujairah. Of these emirates, the two largest are Abu Dhabi and Dubai, both with  about 3 million inhabitants and forming an integral part of the UAE economy. Many call Abu Dhabi the “oil engine” of the UAE and Dubai the “non-oil engine.”

Dubai During COVID-19: Its Success May Be Its Downfall
The major difference in oil production between Abu Dhabi and Dubai can be seen here (Image: Financial Times)

Like many other countries, the UAE has been impacted by the novel coronavirus. Out of the seven emirates, however, Dubai is suffering the most and may deal with the longest-lasting impacts. In order to understand why and what Dubai’s future looks like, we must first begin with its history.

The History

While today Dubai is known as a city with sleek modern buildings, bustling trade hubs, and popular tourist destinations, it used to be a mangrove swamp. In 3000 BC the mangrove swamp dried up and by 2500 BC nomadic cattle herders had settled there. Its trade roots trace back to the 5th century CE when it was a stop on trade routes from Oman to present-day Iraq.

Back then, the main livelihoods of its inhabitants were fishing, pearl diving, boat building, and serving traders passing through. In 1793 Dubai became a dependency of Abu Dhabi, but in 1833 Maktoum bin Butti led his people to the mouth of the Dubai Creek and declared independence. From there until 1893 it was regarded as a simple fishing village, but in 1894 new tax-exemption rules encouraged an incoming flood of expatriates. While important, not until 1966 were fishing, pearl diving, and trading no longer the main economic drivers. In 1966, Dubai struck oil.

Old Dubai when it was just a small fishing village and trade stop

Post-Oil in Dubai: A Massive Period of Growth

Initially, a large part of Dubai’s economy came from oil with its peak production in 1991. Between 1975 and 2011 Dubai maintained a 9% GDP growth rate, one of the highest in the world, due in part to the discovery of oil, but later on because of aggressive investing and diversification by using the accumulated oil wealth. The Dubai Financial Market was established in the 1970s as the first global Shari’a compliant exchange and in the 1980s the Jebel Ali free-trade zone was established to ensure Dubai’s standing as a major trade hub. These were the first steps to the mid-1990’s goal of becoming the business hub of the Gulf region and a major tourist destination.

Currently, Dubai has several free-trade zones (the largest home to ~6,400 companies). Numerous five-star hotels/resorts, several man-made islands, the largest natural flower garden, and many more well-known tourist and investor attractions. They were extremely successful in rising to the challenge of diversifying from oil as a primary part of their GDP. Oil is now only 1% of their GDP, down from half at one time. Dubai ranks first in the Arab World and 4th worldwide in Economic Performance. It is highly ranked among several other categories. With projects such as the Dubai International Financial Centre, modern public transportation systems, the Dubai Creek Tower, the Burj Khalifa, and much more developed or in development, the emirate has been quite successful.

Dubai During COVID-19: Its Success May Be Its Downfall
An economy breakdown by sector from 2013, it is still similar today (Anderson et al., 2015)

Dubai Beginning to Falter

Since 2014 the value of Dubai’s real estate has dropped drastically with property prices falling about 30% as of 2019. At the end of 2019, the al-Maktoum government was planning a 17% expenditure increase, the highest in the emirate’s history, in order to stimulate the economy. Some of this spending was to prepare for the Dubai Expo 2020, which was expected to kickstart the economy. In 2018 growth was about 2%, Dubai’s slowest since the 2009 financial crisis. People were beginning to realize the ‘build it and they will come’ model of the emirate was faltering.

Dubai heavily depends on international investors, but a slump in oil prices factored into a general decrease in demand that has not correlated with a slowdown in construction; the result, oversupply. This occurred with U.S. tariffs on aluminum cutting 10.5% of Dubai’s exports and Trump’s trade war with China threatening Dubai’s shipping. About 60% of China’s exports pass through the city’s free zones, and the problems were mounting. Then COVID-19 hit.

Dubai During COVID-19: Its Success May Be Its Downfall
Falling property prices are due to oversupply and a lack of demand
Dubai During COVID-19: Its Success May Be Its Downfall
The amount sharp increase in supply has not coincided with demand

The Crushing Blow of Coronavirus 

In October of 2020 Dubai had a major economic boost coming: the 2020 Expo. Now the Expo has been postponed until 2021, and Dubai’s already struggling economy is falling fast. The emirate heavily relies on tourism, trade, entertainment, retail, property and expatriates who make up 98% of the private sector workforce. All have been severely impacted by COVID-19.

A survey from the Dubai Chamber of Commerce reports that 70% of Dubai companies expect to go out of business within six months. Around 260,000 Indian and Pakistani workers have already applied for repatriation. Dubai’s International Airport, once the world’s busiest for international travel, is now silent. To top this off, Dubai is facing massive debt obligations due over the next three years stemming from the 2008-2009 financial crisis. According to Capital Economics, Dubai faces $9.2 billion due this year and $30.6 billion by 2023. Dubai’s debt is also concentrated in the most corona-impacted sectors with debt there equal to about 1/3 of their GDP. Much of this debt is also linked to government-firms meaning the emirate’s government cannot easily bail out private businesses.

Dubai During COVID-19: Its Success May Be Its Downfall
Much of Dubai’s debt is in the sectors hit hardest by COVID-19

All Is Not Lost

Both Dubai’s and the central UAE governments have announced stimulus packages, but without a major injection of investments and a sharp increase in tourism, Dubai will need more support. Many believe that similar to the 2009 crisis, Abu Dhabi with its major cash reserves will bail out Dubai. Along with potential support from Abu Dhabi and the reopening of the emirate, many have also pointed to Dubai’s ability to pivot in the past. Karen Young from the American Enterprise Institute cautions against counting Dubai out as “they will find a new way.”

Dubai may be struggling right now and though its meteoric rise does look like a meteoric fall because of coronavirus, it has pivoted before and can pivot again (especially with the economic boost from the 2021 Expo). Do not count Dubai out just yet!

Sources:

https://www.britannica.com/place/Dubai-United-Arab-Emirates/Economy

https://www.visitdubai.com/en/articles/history-of-dubai

https://pdfs.semanticscholar.org/2467/2a568fe540734ac66bd7471b4bafb2e1d93b.p df

https://www.cnbc.com/2020/05/21/coronavirus-dubai-70percent-of-companies-expect-to-close-in-six-months.html

https://www.chicagotribune.com/coronavirus/sns-dubai-economy-threatened-by-virus-20200515-bf6zuuq34bdytmwkxkuj2dwceu-story.html

https://www.quorumcentre.com/build-it-and-they-will-come-not-working-for-duba i/

https://www.ft.com/content/5ff1cc05-64eb-4e1a-bf53-62c7e62d5a2c

 

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