Dubai in need of new economic growth plan

16 April 2012

Despite the signs of recovery in 2012, external factors increasingly dominate the emirate’s economy

Dubai’s economy is showing promising signs of growth in 2012. Core sectors that were responsible for transforming it over the past four decades have been performing well. Passenger numbers at its airports have been steadily rising since last August. Trade volumes are picking up and so have hotel rates.

Some significant progress has also been made on the emirate’s debt pile. Government-owned firms such as Drydocks World, Jebel Ali Free Zone and DIFC Investments are all getting closer to refinancing large debts that were causing concern in financial markets.

But Dubai still sits on a massive overcapacity in its economy, especially in the real estate sector, where speculative buildings are now empty. The $110bn debt pile means it will be unable to finance stimulus spending.

To address this challenge, the emirate is working on a new 2015 strategy. The plan will focus on consolidating well-performing areas of the economy, diversifying trading partners, and trying to ensure that debt-laden firms can grow fast enough to service their debts. The plan is sensible, but the government needs to work fast. It is realising that the economy is increasingly dependent on external factors.

By 2014, Dubai has about $20bn of debt due to be repaid to Abu Dhabi. By 2015, other tranches of restructured debt will become due. The Abu Dhabi bonds will be rolled over, but a lot of growth will need to occur to ensure that Dubai is able to keep servicing its debts.

The emirate has done well to recover so quickly, but with an unstable global economy, it may find its fate rests more on external factors.

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