Dubai Country Analysis

Dubai Analysis

Submitted to:-Prof. Rajesh Madhwan

Date- 18 Mar 10 Submitted By:- Tushar Roy Uma Sangwan Vivek Goyal Vinayan

MAIN STREET OF DUBAI IN 1990

SAME ROAD IN 2003

IN 2007

AL BURJ DUBAI

The Burj al-Arab

• Population - 1.77 million

• Expats are around 90% and out of which 50% are Indian.

• Area-4114 Sq. Km

• Country – UAE

• Capital of UAE – Abu Dhabi

• Time zone UAE standard time (UTC+4)

• (1hour and 30 minute behind India)

• Official language - Arabic

History of Dubai• The first human settlement of Dubai was in

approximately 3000 BC.• first records of the town being made in 1799, when

Bani Yas clan established it as a dependency of Abu Dhabi.

• Dubai became a separate Sheikhdom in 1833, when the Al-Maktoum dynasty of the Bani Yas clan (initially from Abu Dhabi) took it.

• The invention of artificial pearls in 1926 and the Great Depression in 1929.

• 1966, oil was discovered in Dubai.

Culture• The Dubai is a Muslim country.• Mosques are dotted throughout the landscape of Dubai

and five times a day the melodious prayer call or "adhan" will be heard.

• Arabic is the official language, however English is widely spoken by almost everyone and all the street signs are in both English and Arabic.

• Muslim women from the Gulf States typically dress in a long black robe known as the "abaya".

• Gulf men wear a loose, typically white robe called a "dishdasha" along with a white or red checkered headdress known as the "gutra". The gutra is held in place with a black cord called an "agal".

DUBAI FINANCIAL CRISIS

Dubai was another fallout of the global real estate bubble

With global financial markets plunging after Dubai World, the

government investment company burdened with $59 bn liabilities,

requested for deferment of debt to its creditors for six months, on

25th Nov 2009.

Nakheel has a debt of $26bn[ $3.5 bn islamic bond due to be paid

on 14th Dec 2009.

The Dubai government’s total debt is estimated at $80 bn.

Indian stock markets also plunged with heavy selling witnessed in

banking, infrastructure and realty stocks.

REASONS FOR THE CRISIS

• After 2003- Dubai economic model- More debt & less equity.• Advantage of

– Political and economic openness, – Better infrastructure, – Trade mark of regional and world business hub.

• FDI invited- – Invested in real estate-Infrastructure, – Tourism- airway – Trade

• Mismatch between demand and supply.• Dubai has accrued debts of approximately US$85-100 billion, or

around 200% of GDP. • Government restrictions were low.• Lax lending standards and low interest rates.

ROLE OF THE DUBAI GIANTS

• Dubai’s main development engine- Dubai world and its real estate arm- Nakheel

• Issued Nakheel bonds- investors ready to invest as it was state owned

• Today many bonds are due and cash flows not enough to pay them back.– Restructuring effect-– It has a reported US$60 billion in liabilities, offset by a

calculated US$40 billion in assets – There is a maturity mismatch- the expected revenue is in the

future while liabilities, including to contractors and suppliers, are piling up today.

WHY NOT ABU DHABI

• It has oil backing and is loaded with liquid assets.

• It has a diversified portfolio- investment not locked up in one sector.

• In real estate, demand is there so construction is done.

MAJOR IMPACTS OF DUBAI CRISES ON ITSELF

1) Impact on Banking.:-

Those banks which provided finance to various projects are feeling pinch of Dubai crises .

Understandably their shares have fallen since.

2) Fall in real estate prices:-

Building dream projects like the Palm shaped islands, a new urban metro, the world's largest tower, a waterfront to the size of Hong Kong, a leisure park called 'Dubai land‘.

Contd…..

3)Layoffs:- The already reeling construction industry is seeing a

major freefall. Laborers are asked to go home and whatever little construction projects were on the anvil, are shelved.

4)Drop in demand of Gold:- Dubai does not produce Gold on its own, it seeks

exports from countries like India and re-exports them to other countries.

Contd..

5)Immediate drop in oil prices:-

There was slight drop in oil prices as oil contributes to 6 % in Dubai economy.

This crisis is a setback pushing Dubai to rely more on oil revenue. Dubai has to pump more oil out to finance its debt. and as OPEC is not expected to increase the production quotas, expecting oil prices  to go even lower.

6) Depreciation in Dirham:-

The valuation of AED (The local currency of Dubai) saw a drop. This means the strengthening of the Dollar, by a bit.

IMPACT ON STOCK MARKET

Across Asia banking shares plunges down.

Hangsang 3.1% Nikkei 1.8% Shanghai composite index 2.36% Australian stock exchange 3.0% BSE 2.0%

04/08/2023 Economics Project 18

ROLE OF ABU DHABI AS A SAVER

• Dubai asked Abu Dhabi to bail out from this crises. • However , it up to Abu Dhabi, the wealthy capital of

the United Arab Emirates how it would like to assist Dubai.

• Analysts are expecting Abu Dhabi (the senior and controlling Emirate in the UAE) to help soften the blow of this crisis.

• A recent report by HSBC confirms that Abu Dhabi has the cash liquidity to support its own banks and property companies

04/08/2023 Economics Project 19

• Therefore, Abu Dhabi is likely to use some of this liquidity and stability to help prevent a complete collapse of markets in Dubai.

• The UAE Central Bank has already confirmed that it´s board has discussed plans to launch facilities for supporting real estate lending in Dubai, as well as in the rest of the UAE.

04/08/2023 Economics Project 20

RAY OF HOPE

• IN spite of all these, experts hope that it is possible to recover. It comes out of past experience. Dubai had faced similar economic crisis in 1999.Then Abu Dhabi, another emirate in UAE, had helped Dubai by lending a loan of $1,00,000. Abu Dhabi is a financially stable country.

Legal System

UAE federation• The UAE federation was between the rulers of the

six of the emirates (Abu Dhabi, Dubai, Sharjah, Fujairah, Umm al-Qaiwain and Ajman) and was formed in 2 December 1971with ‘Sheikh Zayed’ as president.

• The seventh emirate, Ra’s al-Khaimah, formally acceded to the new federation on 10 February 1972.

• UAE federal constitution provides for an allocation of powers between the federal government and the government of each emirate.

Foundation of legal system• UAE federal constitution permits each emirate to have

its own judicial authority.• Dubai has its own independent courts (and judges),

which are not a part of the UAE Federal Judicial Authority.

• All emirates other than Dubai and Rass Al Khaimah have brought their judicial systems into the UAE Federal Judicial Authority.

• Dubai and all other emirates are dealing with the most important and fundamental principles of law, including civil, commercial, civil procedure, companies, intellectual property, immigration, maritime, industrial, banking and employment law.

The court system• Dubai court has a civil division, a criminal division

and a Shari’a division.

• Non-Muslims are required to respect Shari’a law in Dubai.

• Dubai also has a Labour Court.

• the Dubai courts conduct themselves in the Arabic language

Free zone• Free zone includes :

Dubai International Financial Centre (the DIFC),

the Jebel Ali Free Zone, and

Dubai Media Cityforeign ownership of companies allowed (compared to

49 per cent. for most companies incorporated outside the free zones),

tax concessionsno restrictions on the repatriation of capital and profits

and freedom from currency restrictions and import duties.

Taxation• There is no federal corporate or income tax levied in

the UAE (except on oil companies and foreign banks)

• There is no value added tax or sales tax in Dubai or the UAE

• There are no exchange controls on the remittance of profits or repatriation of capital and

• there are virtually no restrictions on foreign trade

Enforcement of law• Strict law

• buying or selling any drug is a serious crime in Dubai

• Dubai visitors should also remain sensitive to Muslim standards of dress and behaviour, which are generally more conservative than those in the West

Dubai banking system

National (local) Foreign

Continue….

• National bank in UAE are either listed on

Abu Dhabi Securities Market (ADSM) or

Dubai Financial Market (DFM)

INDIAN BANKS IN DUBAI

B.O.B S.B.I

Axis ICICI

HDFC04/08/2023 30Economics Project

INDIAN BANK EXPOSURE Indians bank have a Rs 6500 cr exposure in middle east city.

BOB – 10000 cr for Gulf countries .Bank of Baroda's exposure to Dubai accounts for 2% of its total assets.

MD Mallya, chairman and managing director of Bank of Baroda has pointed out recently that it has an exposure of Rs 4,000 crore to Dubai.

Counts for 7-8% of total loan book accounts.

Both SBI and BOB has an exposure of $50 million to Dubai World.

Foreign banks in the UAE: Loan exposure (in USD bn) HSBC Bank Middle East Limited 17.0 Standard Chartered Bank 7.8 Barclays Bank Plc 3.6 ABN-Amro Bank N.V. (RBS) 2.2 Arab Bank Plc 2.1 Citibank N.A. 1.9 Bank of Baroda 1.8 Bank Saderat Iran 1.7 BNP Paribas 1.7 Lloyds TSB Bank Plc 1.6

Workers productivity• The UAE’s per capita income has more than doubled

from around Dh76,600 in 2006 to Dh162,000 in 2007

• The reason being nominal gross domestic product rocketed from Dh624 billion to Dh729 billion in the same period

• National Employment• Programmes undertaken in 2008 the national

recruitment initiative, of its website www.ershaad.ae

FISCAL POLICY

Fiscal policy is very simple in Dubai. Taxes are zero in free trade zone, including with holding tax. It tries to avoid dual tax liability by signing lot of agreements with certain countries.

The taxes which are applicable in areas except free trade zones are:

PERSONAL TAXATIONIndividuals have to pay extra taxes like service charge

on food purchased from restaurants. Individuals has to pay such extra taxes.

CORPORATE TAXCompanies are required to pay tax on their earnings.

The sliding scale up to maximum of 55per cent.However in practice only oil,gas and petrochemical companies and branch offices of foreign banks are required to pay tax.

PROPERTY TAXAn annual property tax is payable to all

residential properties.The amount of tax payable depends upon the employment status of the tenant. It is the tenant’s obligation to pay the property tax.

INFLATION

Inflation rate in Dubai fell to 1.3 per cent in january,2010. The cost of living rose by just 4.1 percent last year, far less than the 11.3 percent increase in 2008.

In 2008,the rate was 11.3 per cent, on the back of a surge in local rents and food prices due to higher global commodity prices and a sharp increase in its import bill due sharp increase in its import bill due.

Last year strong drop in rental accommodation, commercial real estate and warehousing made Dubai an investment platform. This will certainly have positive implications in further coming years for doing business.

Monetary Policy Currency is pegged with US dollar.

The Central Bank (CBUAE) manages money supply growth by aligning interest rates.

By following interest rate cuts in US, interest rate in UAE also witnessed several cuts in its key interest rates.

The central bank has lowered its interest rate on repurchase of Certificates of Deposits (CD).

Continued…

The 3 month inter bank rate witnessed sharp decline.

Sharp cuts in repo rate at a time of surging liquidity in the economy resulted into steep decline in deposit rates in the country.

The real lending interest rate falls into negative zone in past couple of years.

Solid growth in money supply and modest growth in quasi deposits.

INTREST RATES

GDP2005 2006 2007 2008

NOMINAL GDP ($ BILLION)

135.3 164 200.5 272

GDP PER CAPITA

33.9 38.8 44.8 -

GDP GROWTH RATE

8.2% 9.4% 6.1% 7.4%

Subject Descriptor Units Scale 2006 2007 2008 2009(E)

Gross domestic product, current prices U.S. dollars Billions 164.165 180.180 262.150 228.578

Gross domestic product per capita, current prices U.S. dollars Units 38,818 40,147 55,028 46,583

Gross domestic product based on (PPP)

Current international dollar

Billions 154.405 168.892 185.287 187.851

Gross domestic product PPP per capita GDP

Current international dollar

Units 36,510 37,631 38,893 38,283

Population Persons Millions 4.229 4.488 4.764 4.907

Subject Descriptor

Units 2007 2008 2009 2010 2011 2012 2013

GDP, current prices (IN BILLION)

U.S. d. 180.180 262.150 228.578 256.179 275.548 298.848 326.175

Inflation, av. consumer prices

Annual % 11.115 12.260 2.549 3.318 3.700 3.891 3.870

Current account balance

% of GDP 16.087 15.674 -1.566 5.221 8.760 11.436 12.244

ENTRY &

EXIT BARRIERS

Capital market & availability of capital

Reasons to Invest in the Dubai (UAE)

• Economic and political stability 91.40%• Entrance to regional markets 90.00%• Geographical location 87.10%• Great investment opportunities 87.10%• Gateway to international markets 82.30%• Availability of qualified local partners 77.10%• Looking for new markets 69.90%• Easy investment procedures 64.80%• Suitable use of space for activity 58.40%• Looking for strategic assets 54.20%• High market value of shares 44.90%• Low cost 28.50%• Suitable rental value 28.10%

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Cost of office space(Euro per cm sq.)

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Three sectors to invest

Infrastructure

Banking

Service to extreme needs of sheikhs

CULTURE OF FREE ZONE

• The Dubai International Financial Centre (DIFC)• Dubai Internet City• Dubai Airport Free Zone Authority • Dubai Media City (DMC)• Dubai Knowledge Village• Dubai Healthcare City• Dubai Studio City• Jebel Ali Free Zone

Thank you