Complex Made Simple

Dubai benefits from Arab Spring but investor sentiment remains low

Dubai is still attracting firms and businesses in their droves. The rebound will continue despite the US and Eurozone debt crisis. But not all market participants will see success to rival the hey-days of the first decade of the millennium.

It is an open secret that Dubai, as a stable and economically open hub, has been benefiting from the Arab Spring. During the first half year trade has surged by a quarter to reach Dhs345bn, or $94bn, according to Dubai customs figures. Nevertheless, times are over when setting up a business was a guaranteed success. Last week, Switzerland’s private bank EFG International (not to be mixed up with Egypt’s leading investment bank EFG Hermes) decided to close its branch in Dubai’s DIFC and its representative office in Abu Dhabi.

EFG’s retreat is not necessarily a sign of weakness of Dubai as a financial hub, but rather that the times of easy money in the region are over once and for all. EFG International’s core profit declined 18% in the first half of 2011, and although the emirate is considered the centre for private banking, not all market participants will be able to grab a share. Local banks such as Emirates NBD, Dubai Bank or Commercial Bank of Dubai have all upgraded their private banking service in recent years, confronting outsiders from abroad with a grim new reality.

During the same week, the Dubai Financial Services Authority (DFSA) withdrew the licence of asset management company Siraj Capital (Dubai) due to insufficient capital resources, among other reasons.

Sentiment remains uncertain

Observers also ask why the local stock markets are not going through the roof, if tourism and trade are booming. One Swiss banker told that at in his hotel in the Business Bay Area, where he stayed recently, only four guests gathered in the large breakfast room. And although UAE banks have insignificant exposure to Eurozone debt from countries like Greece – according to Mashreqbank Chairman HE Abdulaziz Alghurair – and new strength at home in tourism and trading, local investors are still listening more to the crisis in Europe, rather than to the sounds of a rebound at home.

The Dubai Financial Market benchmark and trading volumes perform at a multi-year low. Although DP World, the Nasdaq Dubai’s heavyweight, dual-listed its shares at the London Stock Exchange on June 1st this year, turnover at the Middle East’s only international exchange remained low. That the Institute for International Finance (IIF) forecasts the UAE’s GDP growth at 4.4% for 2011 and only 3.1% for 2012 should be warning sign.

The only good news regarding global influences on the UAE economy is that oil prices might remain on a firm level. Saeed Abdullah Khoory, CEO of Emirates National Oil Company (ENOC) said: “For the next year, demand for petroleum products is expected to rise to 90.7 million barrels per day – which is an all-time high. A large part of this strong demand will be driven by the non-OECD (Organisation of Economic Co-operation and Development) countries with Asian economies taking the lead followed by the Middle East.”

Khoory’s opinion is confirmed by Japan’s Tadashi Maeda, Head of Corporate Planning Department at the Japan Bank for International Cooperation. Maeda said last week that the country’s dependence on oil imports will rise until mid-2012, as Japan will still not be able to produce sufficient nuclear energy as a result of the tragic accident of the Fukushima nuclear plant meltdown in the wake of a tsunami.