In 2010, I managed to get stuck in Dubai thanks to the intrusion of an Icelandic volcano.
I went soon after Dubai world had re-structured its debt after property prices fell. The grandiosity of some of the developments in Dubai (the Palm, the idea of a ski slope with artificial snow and lifts in a desert shopping mall, to name but two) made for plenty of humorous headlines but in fact, Dubai had been pushed off the front pages of the papers by the Greek debt crisis, which erupted just days after Dubai's woes started to scare investors in November 2009. Between then and June 2010, the Euro's value fell from $1.50 to $1.20.
This week, I returned to the region. Dubai is booming. GDP growth close to 5%, property prices rising faster than anywhere else in the world. Much excitement has been triggered by a report by Jones Lang Lasalle which has snappy headlines telling us rices are rising at an unsustainable rate, though it also says that measures taken double land registration taxes will help cool the market. Goldman Sachs say it's alright, so we shouldn't worry. It’s not a bubble, it’s just a boom, see.
At first glance, my assumption was that this was Ben Bernanke’s mad monetary policy at work again. Dubai has a fixed exchange rate with the dollar, which means they import US interest rates. If your economy is growing at nearly 5% and money is cheap, you'll get asset booms (or bubbles). In the Middle East, that means insatiable demand for premiership football teams, and rising property prices. So here we go again, I thought.
There is however, an additional driver of demand that didn’t exist in the mad credit frenzy of 2003-2008 - the influx of money and people that has come as a result of the Arab Spring. The rich are either sending their money to the Gulf, or sending themselves there too. It isn’t easy to quantify but the planes are full, the hotels are booming and the anecdotal evidence is plain to see. Reuters estimated earlier this year that DH30bn flowed into the region last year and this year, Cyprus (this year's weakest residential property market), Syria and Egypt will all have added to the flow of money.
I don't know how this will play out in Dubai and the UAE. But global excess money is chasing real assets because the returns on financial ones are derisory and the inflow. And the longer QE and ZIRP continue in the US, the worse it will get. Money is mis-priced and the Gulf boom is being pumped up by money fleeing the crisis in the Middle East and North Africa. Eventually, rates will go up in the US, putting pressure on some borrowers and on any lenders who have too much regional or sectoral concentration. Which is quite a few of the banks in the Gulf.
Meanwhile, at least Dubai was able to re-structure its debt, get help from the rest of the UAE, and let property and asset prices adjust quickly. Spare a thought for Greece, which went into the crisis at the same time but is left with an overvalued currency, struggled to re-structure its debt and even if GDP won't fall for ever, isn't enjoying a bounce and won't any time soon.