Via Dubai

Spearhead Analysis – 02.01.2017

By Hira A. Shafi
Research Analyst, Spearhead Research

Dubai abides by the concept of mixing business with pleasure. A cauldron , brewing with an assortment of arts, cultures & luxuries. It has almost become synonymous with the term ‘dazzle’. It also appears to have skipped several steps of the ‘ standard get rich scheme’ and therefore; despite its magnificent transformation , it leaves in many, a disdain over its ‘nouveau riche’ ways. While, leaving several others perceiving it as a mere mirage in the desert which may not be sustainable in the long run.

While most of the MENA region usually appears to be stifled with perpetual political turmoil and thus remains underutilised in several areas; The UAE portrays a vision of success that stems from cooperation; because social and political stability serve as a precursor to their economic uplift.

Seven tribal ruling families overcoming political differences and forming a workable federation; is perhaps UAE’s biggest success.  The federal government maintains control of key areas such as foreign policy and security while giving each sheikdom sufficient autonomy to apply its own set of laws within its realm. Abu Dhabi serving as the biggest revenue generator carries the most weightage in say over major matters, whereas Dubai holds second place.

Elaborate glorifications usually surround the royals of the Gulf; but Sheikh Rashid Al Maktoum deserves his own set of praises. Often commemorated for his ‘farsighted’ statement:

“My grandfather rode a Camel, my father rode a Camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a Camel”.

— Made shortly after Dubai began oil production. His concern was spot on. Dubai is estimated to hold only 4 billion barrels of oil. But, Abu Dhabi holds approximately 92 billion barrels, Saudi Arabia: 268, Iran: 150 billion, Kuwait: 104 billion and Qatar: 15billion. This concern, led to the identification of a regional need; a trading hub. Both, Jebel Ali and Port Rashid were established during his rule, he resolved differences with Abu Dhabi over presidency of “supreme leadership”, encouraged the other Emirates to create The UAE and called for the use of a single currency.

If ‘’get rich’ was the founding ideology , it was diligently propagated by the successive heirs, usually subtracting any hypocritical facades. This clarity over the ‘wants’ appears to have worked favorably for Dubai. It is believed that the ‘post 9-11 world’ ‘should’ have proved detrimental for Dubai’s reputation. But, opportunities were carved from chaos and in the process they seem to have morphed Emma Lazarus’s quote to “Give me your tired, your rich and confused masses yearning to breathe free.”

Sheikh Mohammed bin Rashid Al Maktoum issued a decree in 2002, allowing foreigners to own freehold property in certain areas of Dubai. This happened in the backdrop of US beginning its war against terror… The terror of uncertainties prompted several from the Arab world to invest in the Dubai realty sector- instead of the US. They also provided a sanctuary to many sanction stricken souls. But, at the same time Dubai also accommodated the US and served as a major pitstop and refuelling station for their forces.

Though, Abu Dhabi was the major beneficiary during the 2002-2008 oil prices hike, as Dubai’s oiland gas exports only accounts for less than 6% of its annual GDP. This period positively impacted Dubai too. Their transformation greatly stepped  up. Several mega construction projects such as Burj Khalifa, Palm Jumeirah, and the World were initiated and mostly completed in this duration.

Property ownership reforms, lax banking rules and development projects surged the expat influx. But, unlike others , their concerns are related to underpopulation instead of overpopulation.

Future challenges:

Dubai, strongly relies on the human force. About 80% of the residents are expats; and the expats also make up 90% of their labour force.

Therefore, it is not abundant oil reserves that are required; but a constant stream of humans to keep Dubai up and running.

The adversities of human deficit were witnessed post 2008 Financial Crises. UAE landed in hot waters. Dubai witnessed a drop in property prices, followed by a wave of unemployment causing several to default on house payments. While some; due to UAE’s stern laws against debtors , left and never returned back.

Rich Abu Dhabi too faced negative impacts post crises – due to the massive drop in oil prices, and shortage of funds because of revenue surpluses from oil sales tied up in US. But, what made matters worse was: several of Dubai’s development projects were halted not solely due to shortage of funds but also due to major shortage of expat labour that followed.

In the context of human force deficit, certain new challenges appear to be on the horizon.

In 2010, the US enacted the FATCA law, which requires foreign financial institutes to share account details of US citizens with the IRS; because even the non resident US citizens are required to pay taxes back home. This law served as a measure to subdue tax evasions; it is stated that nearly 100 billion USD is lost annually from US economy due to such evasions.

Non-compliance could result in a 30% fine on financial institutes. Similarly, the G20 countries requested the OECD to issue the “Common Reporting Standard” regulation. Which allows countries to obtain and share financial  information of various people with their respective countries; in order to combat tax evasions and other illegal money related activities.

Dubai has already signed agreements enforcing FATCA  and is expected to start sharing financial details under CRS from 2018 onwards, whereas data collection begins in January 2017.

A reform in Dubai’s banking law is likely to occur, as formerly bank secrecy was encouraged.

And, though such transparency measures would likely make the world a safer place; it should be ensured that major perpetrators are targeted instead of the harmless bourgeois. There are still certain discrepancies in Dubai’s case that are yet to be sorted.

Ever Since the signing of FATCA agreements; several Dubai based financial institutes are becoming reluctant to deal with American account holders as the implementation process is complex combined with fears of fine imposition.

But, these American expats make up to 0.52% of Dubai’s population, their loss of interest in Dubai could have adverse economic effects.

Further, the reason why Dubai remains very attractive for most people is because of the free zones and the special economic zones.

Each zone usually has its own set of rules and regulations; aspiring to maximize incentives for investors.

Dubai, alongside exempts income taxes  offers several tax concessions, relaxed trade barriers etc. Such carefully constructed measures have enabled several to flourish; somewhat turning Dubai into the home of the ‘nouveau riche’; especially for people from developing countries.

The information sharing under CRS; of individuals’ wealth with third world governments, is raising legitimate security concerns amongst people, because of issues related to corruption, extortion etc. back home.

This might also cause people to look at  other investment options.

Inturn, adversely impacting Dubai’s economy, since a major portion of their earnings stems from sales of service licences required to operate in these zones.

The global concerns raised after Panama leaks, may have also prompted Dubai to rethink certain strategies. Serving as a major tourist destination requires them to uphold a good reputation.

Though, the Panama scandals surrounding Dubai were related to the energy trade; a Canadian- Dubai based law firm was prosecuted for brokering oil deals between three companies and the Syrian government…. But, can Dubai be blamed for this?

It appears they have made their stance clear from the start; i.e serving as ‘a neutral broker’ for a region — which is  a hub of global energy trade, but a victim of political turmoil.

Moreover,  The restrictions to entry in the Gulf energy sector and political unrest, runs parallel to a constant demand for foreign expertise; thus amplifying such ‘under the table deals’ conducted ‘via Dubai’.

However, recently the long overdue opening of market is taking place; Saudi Arabia and Abu Dhabi have opened up several formerly restricted, energy related areas to foreigners. But, peace in the Middle East is a requirement for perpetuating a legitimate smooth flow of business for all countries.

Ways forward:

Despite the challenges; it is unlikely for the ‘sandcastle’ to suddenly collapse.

Because, Dubai has emerged as a powerful global logistician. The Jebel Ali port is one of the 10 busiest ports in the world. Their aviation industry seems to have pretty much surpassed everyone else.

Further, The Vision 2020 enlists several other logistic projects, which includes expansion of airports and ports, aimed at prolonging Dubai’s importance as a key trade route for the world.

The DP world alone, since its inception in 2005, has turned into such a giant that the congress began voicing concerns over their port purchases in the US.

Dubai’s ability to accommodate the entire world in a 4,114 km2  area is truly remarkable; the upcoming Expo 2020 is believed to give the economy a major boost. The annual Shopping Festivals brings in millions of tourists, pouring billions into the country. This also, maintains people’s’ ‘strong faith’ in Dubai.

Dubai, also serves as a major hub for Chinese businesses, recently Chinese investments in Dubai real estate have also surged. Abu Dhabi also caters to China’s Energy needs; but most trade between China and the rest of UAE takes place via Dubai.

Concerns regarding the future of Dubai’s importance in relation to gwadar often surface… There is a difference in vision and the development process. Dubai’s shrewd business sense usually allows it to make the best out of a situation. And, collaboration of the respective governments over the routes- in order  to cater to the needs of the common major ‘customer’- i.e. China; could collectively boost regional economic conditions.

The reduction in costs of transportation and delivery time- for China; because of Gwadar, would lead to increase in oil and non oil related trade(oil trade would most likely be from the OPEC).

In turn, allowing Dubai to make use of its superior logistics and business boosting laws.

Nonetheless, Dubai’s neutrality in comparison to other regional players; has enabled it to profit and… in a unique way and promote regional integration even if, at times it has been “under the table”.

But, earlier this year, Dubai vowed to cut ties with Iran; cessation of licences and deportations followed. The re-exports to Iran , and Iranian investments in the realty sector have immensely  benefited  Dubai . The recent relaxation on Iranian economic sanctions could be viewed as a major blessing for Dubai , since Iran is seeking to increase its oil and gas sales.

In conclusion; the transparency laws may put a leash on Dubai’s economy, especially if, a smooth merger of international laws and local laws does not emerge and core business interests are not protected.

But, so far — It’s still Definitely Dubai!