Introduction
The United Arab Emirates’ (UAE) economy has grown tremendously in last four decades because it has robust economic sectors such as the oil industry, construction, real estate, shipping, tourism, finance, and hospitality, which have significantly boosted its economic capacity.
Moreover, the government provided stable political, economic, and social environment that attracted a fantastic deal of investors into the UAE. Dubai, being one of the prominent states in the UAE, generated a significant amount of Gross Domestic Product (GDP) followed by Abu Dhabi. Thus, Dubai and Abu Dhabi have veto powers in that they can make critical decisions on behalf of the UAE.
Due to the substantial economic growth, the government of the UAE established the Dubai World, an investment company that manages government projects with the objective of elevating economic growth of the UAE. Economic crisis that shook the world in 2008 did not spare the UEA because it significantly affected Dubai’s stock market and diminished its GDP. According to Pradhan (2009), robust sectors of the economy fluctuate according to business cycle, hence causing economic crisis at their dip (p.2).
In response to the economic crisis, Dubai, Abu Dhabi, and Dubai World struggled consistently to alleviate the impact of global financial crisis, which affected many of its robust sectors of the economy. Thus, this essay examines the 2008 Dubai economic crisis, coupled with how Abu Dhabi helped to alleviate its impacts.
Causes of Economic crisis
Economists attribute economic crisis that affected Dubai in 2008 to global economic crisis that originated from United States. Hasan (2010) argues that, global economic crisis emanated from United States property sector and spread gradually across all countries in the world (p.47).
Since Dubai relied on the real estate industry, it collapsed in 2008 due to the crumble of the United States’ economy, which caused a rippling effect on economies of various countries across the world. The value of property fell by 40% and scared away investors, thus causing a decline in profit margins due to low sales experienced.
Through real estate industry, UAE lost billions of dollars that aggravated its economic crisis in the face of global economic crisis that engulfed the world and threatened sustainability of economic growth. Though economists have praised and admired economic growth of Dubai because of its resilience and independence, global economic crisis did not spare it. Thus, global economic crisis were responsible for economic crisis that Dubai experienced in 2008.
Oil industry also contributed significantly to the economic crisis of Dubai. In 2008, Dubai experienced economic crisis that threatened its economic capacity in not only Middle East but also across the world.
During the first six months of 2008, the world experienced a steady increase in oil prices that caused speculations among countries that form part of Organization of Petroleum Exporting Countries (OPEC). Due to speculative factors, oil prices declined significantly by 60% and caused tremendously rippling effect that negatively affected the stability of oil prices in competitive markets.
Decline in oil prices severely affected capital markets of Gulf Cooperation Council (GCC) countries. Onour (2009) asserts that, the decline in oil prices from $120 to $70 per barrel, in the first six months of 2008, had a significant impact on economic growth (p.3). Hence, global economic crisis that occurred in 2008 coupled with the decline in oil prices aggravated economic crisis of Dubai.
The decline in oil prices triggered serious economic crisis in United Arab Emirates (UAE) and shuddered Dubai’s economy considerably. Since oil sector generates about 35% of Gross Domestic Product (GDP), the decline in oil prices predisposed Dubai to serious economic crisis that swept across the world.
Market volatility is another factor that contributed to the occurrence of Dubai economic crisis. Volatility of financial markets predisposes a country to unfavorable economic factors of globalization that have a negative impact on the economy.
According Khedhiri and Muhammad (2008), new legislations in UAE stock markets increased volatility of financial markets because it allowed more foreign investors (p.258). Increased number of foreign investors in local stock markets enhances susceptibility of local economies to international stock markets that follow trends of the global economy. Malik, Ullah, Azam, and Marwat (2009) add that, poor legislations increase susceptibility of stock markets to globalization (p.9).
Hence, even if local stock markets are remarkably stable, their volatility to external influences makes them susceptible to economic crises that occur periodically. Therefore, in 2008, financial markets of Dubai were highly volatile and predisposed it to global forces of the economy.
Dubai debt crisis also contributed to the occurrence of economic crisis in 2008. Dubai’s debt has been growing gradually in the past ten years, and now it has become a significant factor, which determines the economic growth and stability of the UAE. Due to global economic crisis that swept through the Middle East, the Dubai World experienced financial crisis and announced that it was going to delay the repayment of $59 billion debt for a period of six months.
Islam (2009) argues that, Dubai owe investors approximately $80 to $90 billion, which is a vast amount of money that is causing debt crisis in Dubai (p.4). Debt crisis enhanced vulnerability of Dubai to global economic crisis. As Dubai debt increased, it significantly affected its GDP and predisposed UAE to severe impact of economic recession that swept across the world in 2008 and 2009.
Impact of economic crisis
The global economic crisis, which caused financial crisis in Dubai affected Dubai banks negatively. Dubai economic crisis differentially affected banks in Dubai because Islamic banks experienced a significant reduction in profit margins as compared to conventional banks. According to Hasan and Dridi (2010), Islamic banks performed poorly during the economic crisis because their management practices and business models differ from those of conventional banks (p.33).
Dubai’s crisis proved that, Islamic banks have limited resilience, for they did not withstand the global economic crisis or even Dubai’s own economic crisis. Taylor (2009) argues that, the economic crisis worsened due to boom and bust cycles of economic growth that destabilized lending and profit capacity of banks (p.1). Hence, economic crisis considerably reduced profit margins of Dubai Banks during 2008.
Dubai economic crisis severely affected employment and wages of migrant workers. UAE depends on labor from expatriates since they form about 30% of UAE population. According to Rajan and Narayan (2010), UAE obtains about 75% of its labor from Asia: 25% constitutes skilled labor, 25% semi-skilled, and 25% unskilled (p.34).
Migrant workers contribute substantially to economic development of Dubai, for they constitute about three quarters of the labor force. In the face of economic crisis, companies that provided employment encountered economic challenges, which compelled them to reduce wages and lay off some of their employees. Construction companies like Arabtec dismissed about 40% of its employees as economic crisis severely hit the company.
Moreover, wages and salaries decreased by about 30% in 2008 as compared to 2007. The economic crisis profoundly affected skilled and semi-skilled workers because of increased food prices and accommodation coupled with reduced wages and salaries.
The economic crisis also shattered the UAE’s financial markets and destabilized the economic growth of Dubai as a commercial hub in the Middle East. Prior to 2008, stock markets grew steadily but due to the economic crisis that occurred in 2008, they began to deteriorate significantly.
Ellaboudy (2010) contends that, the economic crisis compelled Dubai to borrow money extensively to run its projects that Dubai World manages because bond market of GCC countries deteriorated markedly (p.182). During the economic crisis, Dubai World experienced financial crisis that stalled its projects, and thus forcing UAE and Dubai to intervene by providing more funds.
Guerrero (2010) explains that, the economic crisis caused serious losses in Dubai’s stock markets as investors lost about $600 billion dollars during the crisis (p.7). Regarding real estate property, Dubai lost approximately 42% of its stock following the economic crisis that crumbled its economy. Other sectors of the economy that operate in stock markets also experienced a significant decline in their sales and profit margins.
Importance of Abu Dhabi
Abu Dhabi played a critical role in alleviating the impact of economic crisis on Dubai and UAE. Given that Dubai was grappling with the debt crisis that worsened its economic crisis in the face of global economic crisis, Abu Dhabi offered $20 billion to help Dubai get out of financial crisis that was crippling its projects under Dubai World.
According to Islam (2009), given that Dubai World was contemplating to delay repayment of its debts, Abu Dhabi pumped $20 billion to alleviate debt crisis and increase liquidity of Dubai’s finance (p.2).
Since Dubai’s debt was about $60 billion, the Abu Dhabi assistance covered about a third of the debt and enhanced Dubai’s economic capacity to sail through the economic crisis. Thus, Abu Dhabi played a significant role in mitigating Dubai’s debt and consequently empowered it to face economic crisis that threatened to cripple it unreservedly.
Given that the economic crisis severely affected economic growth and development of Dubai, Abu Dhabi came to its rescue by offering additional financial assistance as economic stimulant. Muzio (2010) states, were it not for bailout that Dubai received from Abu Dhabi, the impacts of the economic crisis could have been much worse (p.16).
Abu Dhabi produces about 94% of oil that originates from the UAE; thus, it has much capital to aid other states within the UAE and even under GCC countries. In the bailout, Abu Dhabi gave $10 billion to Dubai World because outstanding projects that generate millions of dollars were stagnating amidst financial crisis that hit Dubai. About $4 billion helped in settling the Dubai World’s debt and, the remaining $6 became helpful in running of projects.
Conclusion
In the last four decades, Dubai has experienced steady and stable economic development and many nations across the world envied its economic growth. Stable political, social, and economic environment encouraged investors and promoted investment. Dubai also relied on varied robust economic sectors such as banking, tourism, construction, oil industry, tourism, hospitality, and real estate amongst others.
However, in 2008, global economic crisis shook Dubai’s economy, destabilized oil prices, enhanced volatility of markets, and worsened debt crisis, which consequently led to the economic crisis in Dubai. The economic crisis then affected the profitability of banks, caused dismissal of migrant employees, and weakened the lucrative capacity of stock markets. Ultimately, Abu Dhabi gave $20 billion to Dubai to alleviate its debt, and offered additional $10 million as economic stimulant to Dubai World to run stalled projects.
References
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