Dubai the model of a modern Middle East economy

For more than 100 years, the Middle East has been defined by oil exploration, production and its boundaries. Now the region is getting re-purposed by its aspiration to grow beyond fossil fuel. The shake-up in Saudi Arabia’s royal family was as much about becoming a 21stcentury economy as it was about rooting out corruption.

None of the region’s petro states has moved further from its oilfield roots than Dubai, which has been diversifying its economy since the 1970s. The result is a thriving gateway to globalisation with a superior economic outlook.

The largest of the seven United Arab Emirates and home to more than 200 nationalities, Dubai is growing faster than its neighbours as the No.3 regional tourist destination behind Turkey and Saudi Arabia. Situated within eight flying hours of two-thirds of the world’s population, Dubai has the region’s busiest international airport measured in total passengers and fourth-largest airline based on revenue per passenger kilometre. The city’s Burj Khalifa is the world’s tallest building, rising above Jebel Ali, the ninth-largest port. The relentless commitment to infrastructure development turned Dubai into the Mideast hub for finance, information technology, real estate, shipping and even flowers.

Oil production, which once accounted for 50% of Dubai’s gross domestic product, contributes less than 1% to GDP today. The transformation of the economy accelerated as oil surged to a record US$147 a barrel in 2008 and continued in the aftermath of the financial crisis when oil plummeted to a low of $26 in 2016, according to data compiled by Bloomberg. The building boom persisted even as Dubai World, the government-owned holding company, sought a “standstill” on debt repayments while it restructured $25 billion of debt in November 2009 and some borrowers fled the emirate as a result.

The credit crunch and ensuing slowdown made Dubai even more determined to overcome the Mideast oil legacy. Energy officials in 2016 said renewable energy will account for 25% of the emirate’s needs in 12 years. Sheikh Mohammad Bin Rashid Al Maktoum, vice president and Prime Minister of the UAE and ruler of Dubai, a year ago said that the renewable percentage will rise to 44% by 2050. That’s when Dubai aims to produce 75% of its energy requirements from clean sources.

The strategy for making the emirate a green economy included a policy of expanding infrastructure. Even as oil prices declined 50% in 2014, construction continued unabated for Expo 2020, which aims to showcase “opportunity, mobility and sustainability” with a specific focus on education, financial capital, logistics, natural ecosystems and biodiversity, among other themes.

All of which is reflected in the stock market, where Dubai is unique in the Persian Gulf. Historically, equity prices of Middle Eastern companies rise and fall with the price of crude.

Not in Dubai. Since 2003, when oil began its five-year march to all-time highs, the correlation between share prices of its real estate companies and the oil price declined to 0.3 from 0.7, a transition statisticians characterise as “moving in a similar direction” to “no relation”, according to data compiled by Bloomberg.

Between 2009 and 2012, when oil doubled its value, the Dubai stock market appreciated 14% and its real estate companies gained 48%. With oil down 37% since 2013, the Dubai stock market is up 155% and real estate firms are 135% more valuable, according to data compiled by Bloomberg.

Corporate Dubai is represented by the Dubai Financial Market General Index, consisting of 36 companies. Since 2003, the seven companies that make up the real estate and construction sector of the index produced a 789% total return (income plus appreciation), beating the benchmark’s 417% as well as the 250% return for the 242-member Bloomberg World Real Estate Index.

No other market in the Persian Gulf comes close to replicating the performance of Dubai real estate.

Dubai now is poised to be the growth leader among the six countries in the Gulf Cooperation Council, with GDP expanding 3% or more this year and in 2019, according to economists surveyed by Bloomberg. Saudi Arabia, which outperformed Dubai in growth in five out of the six years before 2016, remains the laggard.

Oil production, which was once 50% of Dubai’s GDP, contributes less than 1% today.

Matthew A Winkler is a Bloomberg View columnist. He is the editor-in-chief emeritus of Bloomberg News.