The financial downturn in Dubai has dashed the northern emirates’ dreams of growth and forced them to rethink their economic ambitions
Ras al-Khaimah and the other four northern emirates of Sharjah, Ajman, Umm al-Quwain and Fujairah have long stood in the shadows of Dubai and Abu Dhabi, and have not attracted the same high levels of inward investment.
But Ras al-Khaimah’s latest effort to emerge from the shadows was dealt a blow in October when, two months after being announced as host of the February 2010 America’s Cup sailing competition, a US court enforced a 122-year-old deed that prevents the regatta being held in the northern hemisphere during the winter months.
- The UAE’s four northern emirates together account for just 12 per cent of the country’s GDP
Staging the event would have been a confidence boost for the emirate, whose economy, in common with most worldwide, has suffered in the wake of the global recession. It would have also helped the federation’s fourth-largest emirate raise its profile both regionally and internationally, taking it a step closer to its aim of increasing visitor numbers to 2.5 million by 2012, from about 220,000 in 2008.
“It is a great moment for us,” said Sheikh Saud bin Saqr al-Qasimi, crown prince of Ras al-Khaimah, at the time of the August announcement. “It is a reflection of what we have achieved in terms of becoming the destination for tourists and trade and industry, and of our integration in the world at large.”
Ras al-Khaimah has invested an estimated $120m in infrastructure to stage the event. Unless the appeal by the current holders of the cup, the Swiss team Alinghi, to a New York court results in the decision being overturned in early December, the bid to host the race will be written into history as a setback for the emirate’s growth aspirations.
In December last year, the emirate’s airline, RAK Airways, was forced to cease operations amid financial difficulties, having been in operation for little more than a year. The global economic crisis was also cited as a major factor in the US’ George Mason University’s decision to shut its three-year-old Ras al-Khaimah campus in May 2009, one year before its first students were due to graduate.
The property markets in the northern emirates have fluctuated in line with Dubai’s fortunes. In the first half of 2008, as sales and rental prices in Dubai increased by more than 50 per cent, levels also climbed sharply in Sharjah, Ajman, and to a lesser extent Umm al-Quwain, as prospective buyers and tenants widened their property searches.
But following the collapse of the real estate sector in Dubai, that same ripple effect has acted in reverse. According to local property services firm Asteco, average rental prices across the northern emirates have fallen by more than 30 per cent since the fourth quarter of 2008, wiping out the gains made when the market peaked in September last year.
As in Dubai, stories now abound in the northern emirates of developers yet to begin construction on projects despite buyers having already made substantial off-plan payments.
“Everybody has to be realistic again. We are going back to the old days when reality prevailed”
Rami Dabbas, CEO, Aqaar Properties
“The real impact on the northern emirates has been the spillover effect from what happened in Dubai,” says Abdulkhaleq Abdulla, professor of political science at Emirates University in Al-Ain. “These emirates had it good when Dubai had it good. They are not satellite economies but they are linked more to Dubai’s swings than to Abu Dhabi’s.”
It is in part these links with the Dubai economy that have caused credit ratings agency Fitch Ratings to lower its ratings on two banks headquartered in the northern emirates, and revise its assessment of the UAE authorities’ ability and willingness to support them. In September, Fitch downgraded both Bank of Sharjah and National Bank of Ras al-Khaimah to BBB+ from A-.
“Banks may be based in a certain emirate but that is not where all their business is,” says Robert Thursfield, director, financial institutions, at Fitch. “For example, most of National Bank of Ras al-Khaimah’s business is in Dubai and other emirates. It is a big player in the retail banking market and is not just doing that in Ras al-Khaimah, which is very small.”
The fundamentals of the economies of the northern emirates, which together accounted for just 12 per cent of the UAE’s gross domestic product (GDP) of $250bn in 2008 – with Sharjah alone accounting for 7.7 per cent – are generally sound, particularly as they benefit from federal funding for most public services, so they do not have to rely solely on their own GDP to fund them.
Although there is a lack of data and transparency surrounding these emirates, it is believed that, in contrast to Dubai, which took on far more projects, the authorities in the northern emirates have not overburdened themselves with debt.
According to a report published in February by Fitch, the public sector debt burden in Ras al-Khaimah is about 24.3 per cent of its GDP, while its assets, which include stakes in public and private companies, are valued at 38 per cent of GDP. The emirate also has no significant debts set to mature until 2012-13. By comparison, Dubai has $13.1bn in credit maturing in 2010, and $19.5bn in 2011.
But having dared to dream of a rapid transformation of their economies, the harsh realities of the global financial downturn have forced the northern emirates to rethink their ambitions. “Now everybody has to be realistic again,” says Rami Dabbas, chief executive officer (CEO) of local developer Aqaar Properties, which is building 12 residential towers in Ajman. “We are going back to the old days when reality prevailed.”
Focusing on strengths
Basic industries and manufacturing have long been the mainstays of the northern economies. The local authorities are focusing on these strengths once more and trying to attract external investment by marketing their emirates as a low-cost base in the UAE.
There is one project currently in the planning stage that could revive the fortunes of the outlying emirates. The federal government is progressing plans for a railway linking all seven emirates. The AED30bn ($8.1bn) Union Railway will form part of the wider GCC railway and will be capable of transporting both passengers and cargo.
The authorities have already fixed the route for the rail network in the emirate of Abu Dhabi, and the authorities in Dubai and the northern emirates are currently deciding on the route for the rest of the network. Construction of the railway is expected to be completed within five to seven years.
The passenger trains will travel at 160-200 kilometres an hour (km/h) and freight trains will move at 80-100 km/h, which will cut travelling times between the various emirates.
“Union Railway will support the continued economic growth of the entire UAE by providing a world-class logistics and transport network for both freight and passengers,” says Richard Bowker, CEO of Union Railway.
“It will provide an opportunity for the northern emirates to access new markets and stimulate new demand.”
Yet even with these improved transport links, the northern emirates have to resolve their long-running power supply problems before they can hope to truly prosper (see feature, page 36). The shortage of electricity in the emirates is compounding the impact of the global recession, further undermining investor confidence, not just in the real estate sector but across the whole spectrum of the economy. And it will continue to do so until the issue is resolved.
In the summer, Sharjah residents suffered the effects of power supply not meeting demand, with long electricity blackouts and businesses forced to cut their working hours.
“They have to attend to the infrastructure, especially the water and electricity,” says Abdulla. “They will never be able to play a major role without these basic necessities.”
While the northern emirates’ power and infrastructure needs may not be on such a large scale as those in Dubai or Abu Dhabi, it is a crucial test for the emirates’ governments in creating the right environment for future investment and economic growth.
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