The UAE is well placed to prosper in the next recession

(FILE)   

 

This correspondent was sent to Hong Kong in late 1992 to write about the construction boom in what was then a British colony looking forward to rejoining the Chinese motherland in 1997 as a Special Economic Zone.

 

At that time Hong Kong was booming, and the British economy sat mired in its worst recession since the Second World War – people were losing  jobs, homes were being repossessed for non-payment of mortgages – therefore, being a financial journalist meant writing endless articles about business failures.

 

A combination of huge government spending on major infrastructure projects, including a massively expensive airport designed by Foster Associates, and negative real interest rates – due to the local currency’s peg to the US dollar – had kept the local economy booming despite a slump in nearby Japan.

 

You had to wonder about the wisdom of building such a massive airport on a reclaimed island when business prospects in other parts of the world looked so gloomy.

 

But there was no doubt about the positive impact on the local economy. Business confidence was sky-high and profits were rolling in.

 

Another reason for the boom was interest rates in Hong Kong were negative – lower than the rate of inflation.

 

This made investment in property highly profitable as finance often cost less than the rise in the value of real estate during construction.

 

Fast forward to 2008 and you surely have a parallel situation in the UAE.

 

The Governments in Abu Dhabi and Dubai have committed huge sums to infrastructure spending – including new airports and a Metro in the case of Dubai.

 

In the early 1990s, the Hong Kong Government had its enormous foreign currency reserves to draw upon.
In 2008, the UAE has the accumulated wealth of the oil boom of the 2000s to spend and with oil prices at current levels there is $240 million every day in oil revenues.

 

The Fed is cutting interest rates to bail out its sub-prime banking crisis, and this is being mirrored by the introduction of very low rates in the UAE.

 

Local inflation is running around 10 per cent, so with a three per cent base rate it means the UAE has negative real interest rates of minus seven per cent.

 

No wonder money continues to flow into real estate development. This is reminiscent of the heady optimism of Hong Kong in the early 1990s.

 

Of course, all parties have to end. In the case of Hong Kong, the day of reckoning struck very soon after the handover to China in 1997 with the subsequent Asian Financial Crisis followed in no short measure by the dot-com crash and the SARS health scare.

 

Property prices actually fell by 70 per cent from the peak to trough, and mid-range residential homes are still not back to their previous levels.

 

However, the important lesson that the UAE can learn from the Hong Kong parallel is that the downturn did not strike until most of the infrastructure work was finished and the new airport open.

 

The momentum of this investment was formidable and carried the Hong Kong economy forward during a particularly bad period for the global economy.

 

If you look at the timescale of investments currently going on in the UAE, then the time horizon is more than five years until completion; and it is hardly surprising that all the contractors of the world are now focusing their attention on the UAE, just as they did in Hong Kong in the early 1990s. 

 

There are people who choose to doubt what they see in front of their  eyes and who worry about a local real estate crash. It was the same when I visited Hong Kong in 1992.

 

Some people in a boom will worry about the future, while others just get on with making money from the good times.

 

The doubters should ask themselves: are airports likely to be left half-built or high-rise towers abandoned mid-construction? When you start building something you tend to finish it, unless you run out of money.

 

Otherwise you will never benefit from what you have started to build.

Besides, if the world goes into a recession, then the price of building materials and manpower will fall and the work will cost less than expected.

 

Hong Kong completed its glitzy airport and so the UAE will also finish its multi-billion dollar programmes – which actually exceeds the investment planned in China over the same period.

 

With negative real interest rates as well, how can the economy fail to continue to boom?

 
 
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