Dubai’s 2020 World Expo win may fuel boom, but risk bust

Hosting event will trigger billions of dollars of new investments

DUBAI, Nov 27, (RTRS): Dubai’s success in bidding to host the 2020 World Expo will trigger billions of dollars of investment in the emirate, but it may risk a repeat of the boomand-bust cycle which nearly caused financial collapse just a few years ago.

After competing against three cities, Dubai was awarded the world’s fair by the Bureau International des Expositions on Wednesday, setting the seal on a dramatic economic recovery.

Four years ago, the emirate of 2.2 million people nearly defaulted on its debt after a real estate bubble burst, causing property prices to crash over 50 percent between 2008 and 2010.

Now a boom in trade, tourism and finance is repairing the damage and Dubai again has the resources to plan big projects. But some businessmen fear the additional investment for the Expo may be hard for the economy to absorb.

Hopes for a successful Expo bid have already contributed to speculation in the property market, where prices are up some 20 percent over the past 12 months, and the stock market, where the index has soared 79 percent this year.

Further large rises could start to hurt Dubai’s economic competitiveness by raising its cost base — and conceivably set the emirate up for another crash down the road.

“(The Expo)...is a powerful symbol of Dubai putting the 2009 bust behind it and of the world recognising the strengths of its political stability and its open, exportoriented real economy,” said Simon Williams, chief Middle East economist for HSBC.

Challenge

But he added: “The key challenge policymakers now face isn’t generating growth but managing it, making sure it’s sustainable and well-balanced. Policy decisions over the next 12 months will determine how successful Dubai will be in avoiding a repeat of the boom-and-bust cycle further down the line.”

Because of Dubai’s small population, the Expo may have more of an impact on it than most host locations. The government thinks the event will draw over 25 million visitors, 70 percent from outside the United Arab Emirates, and create 277,000 jobs — though some analysts a local business chamber says the resulting instability has forced more than 150 foreign investors to close their companies.

Mohammed Frikha, owner of local Syphax airline and one of the country’s most prominent business leaders, said protests and strikes worry investors and needed to be addressed to attract investment again.

Exports, which along with remittances from Tunisians working abroad and tourism traditionally bring in foreign currency, have been hit and the trade deficit reached $5.3 billion in the first nine months of this year.

Foreign currency reserves fell in June to 10.473 billion dinars ($6.27 billion) equal to 94 days of imports and for the first time below the 100-day level that the believe those numbers may be too high.

A huge exhibition centre will be built on the 438-hectare Expo site, plus tens of thousands of new hotel rooms and an extension to Dubai’s metro line.

The government expects infrastructure spending to total some $6.8 billion; overall Expo-related spending, including private sector projects, may reach $18.3 billion, HSBC estimated.

By themselves such figures, spread over seven years, look manageable for Dubai’s $90 billion economy. But they come on the back of other grandiose projects announced by Dubai’s real estate developers in the past year, including a replica of the Taj Mahal, a residential area with a giant pyramid, and an apartment complex with penthouses worth $250 million each.

Alan Robertson, regional chief executive for property consultants Jones Lang LaSalle, which advised Dubai on its Expo bid, predicted interest in real estate would now rise further.

“While the Expo will result in longterm benefits to the Dubai economy and the real estate market, the short-term impact needs to be managed carefully to avoid the inevitable boost in sentiment translating into excessive price growth or over-development,” he said. central bank considers adequate. This compared with around 140 days in late 2010.

Despite all the problems, Tunisia remains in better shape that larger peers such as Egypt.

“The economic situation in Tunisia is difficult, but it is not a catastrophe. Reforms will come with the change in politics and the end of the crisis,” said Ezdine Saidane, a local economic analyst. “The economy has been hit hard but it is still possible to pull out of this.”

Under pressure from its international lenders, the Tunisian government has said that it is moving ahead with austerity measures including a 5 percent cut in public spending and a freeze on public sector wages in 2014.

Also, Dubai lacks the oil wealth and deep fiscal reserves of other rich Gulf states, so government-related entities (GREs) look set to finance much of their Expo work with bank loans.

Heavy borrowing by GREs, whose debts are already worth about 90 percent of Dubai’s gross domestic product, were at the root of the 2009 crisis, Londonbased Capital Economics noted.

Authorities say they have taken steps to limit the risks.

In October Dubai doubled, to 4 percent, the fee charged on land transactions in an effort to deter property speculators. The UAE central bank this year set rules to restrict mortgage lending and limit banks’ loan exposure to big state firms.

It is not clear if such steps will help cool the stock market. In the short term, shares may rise further because of a feelgood factor, fund managers and analysts said. However, it will take a year or two for Expo-related spending to ramp up, and the stock market rally is likely to slow well before then.

“We should see a surge in the stock index and later a sell-off. The Expo is priced in but the economic benefit won’t materialise before 2015,” said Ali Adou, portfolio manager at The National Investor in Abu Dhabi.

The government expects the budget deficit to narrow to about 6.5 percent of economic output next year from 7.4 percent in 2013. But the IMF also wants cuts to fuel and basic food subsidies, measures which are likely to exacerbate tensions for the new government.

So far, three candidates are in the race for the post of prime minister for the caretaker government, including a former central bank governor, a veteran politician who served at the United Nations and an ex-finance minister.

But the political wrangling means little to those looking for work or to feed families. “Since the revolution, we have seen fish and meat only on television,” said Ramzi Said, 33, a building guard at a Tunis market. “We cannot buy them because of rising prices.”