Dubai's economy has endured a roller coaster ride over the past year, going from boom to bust and now is showing signs of recovery, with improvements evident across all sectors.
This pattern is common across most emerging market economies, which have shown great resilience to the financial crisis. The best indicators of this resilience of emerging markets are the equity indices of national stock exchanges.
Equities in Brazil, China, Russia and India have all shown reasonable gains for the year to date, climbing between 50 per cent and 78 per cent. Likewise, both financial markets of the UAE have begun to climb back, with the Abu Dhabi Securities Exchange gaining 24 per cent and Dubai Financial Market 34.35 per cent. The Central Bank of UAE's role in boosting liquidity and monitoring UAE banks' loans-to-deposits ratios and capital adequacy is partly responsible for this improvement.
It is widely believed that emerging market growth will over-ride the stability benefits of developed markets. This favourable sentiment towards emerging markets can find its foundation in the public finance of emerging markets versus developed markets. The budget balance of the US and the UK stand respectively at -11.7 per cent and -11.6 per cent while Latin America, Russia and China stand respectively at -0.6 per cent, -0.8 per cent and -3 per cent. What a reversal of fortune from the previous crisis!
Even by means of current accounts, all emerging markets fare better than the US and the UK.
However, it is important to realise this emerging market rally is also based on the belief that developed economies will rebound, and statistics show this is happening. The US, the UK and Eurozone data show manufacturing, housing and consumer confidence across these regions have all surpassed expectations in recent months. This positive growth in assets (equity, credit) tends to loop back into overall business activity and create a virtuous cycle.
For all its negative aspects, it is important to understand the benefits brought by the economic downturn. Dubai's real estate sector has been hit hard, but as a result it is transforming itself over time into an end-user market with better financial soundness for all parties. This includes the assurance that financing is available before investors and real estate developers start tying the knot, instead of embarking on what was in the past an assured divorce.
A growth in savings rates for individuals and treasury availability for corporations is another positive by-product of the economic crisis.
Too much confusion between investments and savings or assets and liquidity existed previously. Savings rates have been soaring these past months in the countries most affected by the global crisis; Spain has reached 19 per cent in 2009 and is expected to hit 26 per cent in 2010.
Though the US is only at 4.8 per cent in 2009, it was at 0.6 per cent in 2007, representing an eightfold increase in savings. Although data is not yet available in the UAE, we have no doubt residents are increasing their savings nest, which is a sound response that in time will lead to normalised credit conditions and strong economic growth – not anticipated, but real.
- Jacques Bernard is Chief Investment Officer at National Bonds Corporation PJSC
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