Over the past two decades, Dubai has gone through a remarkable transformation from a small re-export center and regional trading post to a global transportation hub, a major financial center and a global tourist destination.  This rapid development did not come without the expected growing pains namely, the Global Financial Crisis of 2008-2009, which hit Dubai particularly hard due to its debt-fueled growth.

Since the crisis, Dubai has returned to its rapid development pace (and debt-fueled growth), including massive infrastructure development projects such as the canal expansion.  However, signs today show strain on its growth model again pointing to problems ahead.

Strong dollar affecting global trade and tourism

The UAE dirham, which is pegged to the US dollar much like other GCC countries, has been a blessing and a curse.  A weak dollar is a blessing because it makes Dubai more competitive in shipping, tourism and real estate investment, it’s main sources of income.  The era of the weak dollar, however, ended over two years ago making Dubai less attractive a tourist detestation and less competitive as a business hub.

Source: Yahoo Finance.

Source: Yahoo Finance.

The table above shows how much foreign currencies have depreciated against the US dollar, and hence the UAE dirham, over the past two years.  The currencies in the table represent the countries that have been a major source of tourist and investment income in Dubai.  The significant depreciation in these currencies versus the UAE dirham are hurting Dubai’s growth targets.

Global shipping is also being affected by the strong dollar, which has been a symptom of a broader global economic slowdown.  The amount of shipping cargo handled at Dubai’s ports in the past three quarters were data was available was down 6.2% (this includes the period from Q4 2015 to Q2 2016).  The leading economists in Dubai had originally foretasted modest growth in cargo shipments.

Lower oil price hurting overall economy, especially the banking sector

With oil down over 50% over the past two years, government spending, which is a major driver of economic growth is down.  Even as the price of oil rebounded from the low $30s to the $50s recently, it’s still a sharp fall from $115 where it was in early 2014.  Our long-held forecast is that oil’s recent rebound will be short-lived and it will resume its fall to the $30s where it will remain for several years.  Should this forecast materialize, it will be devastating to Dubai and the entire GCC region.

Earlier this year, Abu Dhabi’s oil giant ADNOC announced that it was cutting thousands of jobs in order to manage the sharp drop in oil revenues.  The oil services industry has been the center of job cuts across the UAE, but it has not been the only sector affected by the drop in oil.

The banking sector has also been cutting costs and jobs.  The slowdown in government spending is directly affecting the banking sector.  New loans, a sign of a growing economy have been falling (see chart above).  Government deposits in the banking system have also been falling as government entities across the UAE withdraw their deposits to fill the gap in their budget deficits.  The UAE’s biggest lender National Bank of Abu Dhabi (NBAD) saw government deposits drop by more than $13 billion between September 2014 and 2015.  The shrinking deposit base is one of the reasons cited for the merger announcement with rival First Gulf Bank (FGB).  Banking analysts are expecting more mergers as the slump in oil continues.

Regional belt-tightening and geopolitics is putting pressure on non-oil sector growth

Not only has belt-tightening been felt across the UAE, it is also being felt across the region among Dubai’s main sources of tourism income; Saudi Arabia, Egypt and India.

In September, Saudi Arabia canceled bonus payments for state employees and cut ministers’ salaries by 20%.  Saudis, who have traditionally been a stable source of tourism and investment, have started to visit the emirate less.

Egypt’s economic problems and recent currency devaluation have also hurt Dubai’s tourism market.  India too is dealing with its own economic problems and recent currency fiasco, all of which will translate into fewer tourists for Dubai.  For those who still travel there, it means spending less.

Emirates Airline is already feeling the pain.  It announced that its earnings have fallen 75% so far this year.  Emirates, however, is not the only Middle East airline feeling the pain, its rivals Etihad of Abu Dhabi, Qatar Airways and Turkish Airlines are also hurting.

Domestic slowdown and overcapacity

Over the past decade, Dubai has built more residential properties and hotels than demand in an effort to keep up with the planned growth rate.  However, this expected growth rate has not materialized leading to overcapacity.  According to Cluttons, the international real estate management company, residential real estate in Dubai is down at an annualized rate of 7.6% this year and is still down 26.7% of its peak in Q3 2008.  Hotel occupancy rates have also continued to fall as a result of weak demand coupled with a rising number of hotel rooms.  Hotel rates have fallen in line with the overall slowdown.

In addition to a rising supply of new properties outpacing demand, there is also a slowdown in hiring further dampening the demand outlook.  Expats are choosing to leave the UAE because it has become too expensive for them or they are worried about job security.  For some, they have no choice but to leave as companies look to cut costs by cutting Western expats due to their high salaries and packages.

Conclusion

Though Dubai’s long-term outlook is bright, it’s short and medium term outlook remain weak.  The emirate is up against factors beyond its control, such as low oil prices and a strong dollar.  Massive project developments, which include residential real estate and hotels, is causing a large oversupply in the market.  Demand is years away from catching up.  Based on this, we believe that real estate prices will witness significant declines before they can recover along with falling hotel rates for several years.