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Newsletter 09/2014

Finance | Is the UAE a financial safe haven?

 

In the Arab Spring, Dubai was the safe haven of choice in the Middle East and the inflow of money and people helped to end the recession of 2009-10. The city also grew the fastest in the world in the chaotic aftermath of the US-led invasion of Iraq with 13 per cent annual GDP growth from 2003-8.

Will Dubai again be a safe haven as money leaves Russia in the wake of US and EU economic sanctions over the crisis in Ukraine? Could the break up of Iraq and the formation of the Islamic State have an impact? What about the horrific recent events in Gaza?

It is certainly easy to imagine some serious Russian capital flowing Dubai’s way. The city is already well known as a popular holiday destination for Russians, many have bought homes in Dubai and business links are strong. On the contrary they’ve pulled the plug on London property where prices slumped by six per cent last month.

The violence in Iraq, Syria and Gaza are another matter. Sure Dubai is a safe haven in terms of geographic proximity, being as far away as London from Moscow. But the smart money probably left these places a long time ago. The UAE federation of which Dubai is the commercial capital did not experience any Arab Spring protests. But the wrangling over Iran’s nuclear program continues and Dubai is a near neighbor.

That said the UAE’s oil pipelines to the eastern coast give it a secure export route avoiding the vulnerable Strait of Hormuz in the event of a showdown with Iran.However, what probably assures Dubai further growth under almost any circumstances is the ease and openness of the city to do business of almost any sort.

If one area of the world becomes difficult for business or imposes sanctions to prevent it happening then money will move elsewhere. Dubai has always worked to create a business environment in which capital from overseas can be invested for higher returns, with its enviable infrastructure and lifestyle opportunities. It does so without directly taxing its residents on their income or capital gains.This is a win-win environment for global investors with the savvy to work in an environment without the suffocation of too much bureaucracy or legislative protection.

It’s also part of the explanation for Dubai’s rapid recent recovery from its awful recession of 2009-10, real estate crash and massive debt write-offs.On the other hand, if the world now goes through a second global financial crisis the UAE will hardly be unscathed as one of the world’s most open economies.The recent correction in the local stock markets may be predicting a coming recession not a boom. The DFM crash in 2006 did forewarn of the big collapse in 2009-10.

Still the geopolitics of the Middle East and Ukraine probably assure high energy prices going forward and central banks would likely up money printing again in a crisis and that would also support oil and gas prices. That will keep the UAE economy safe as much as foreign investment inflows.

Peter Cooper

peter.cooper@arabianmoney.net

Arabian Money

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