Source : Business Times – 4 Dec 2009
Dubai lacked a development plan backed by fundamentals and prudence
IT IS really a contrasting tale of two cities.
Singapore, which is fundamentally strong, is now bracing itself for an economic recovery next year, while debt-ridden Dubai finds itself under the spotlight due to its credit woes.
But as recently as four years ago, Dubai was portraying itself as the ‘Singapore’ of the Middle East, not least because of the fact that the tiny Gulf state’s economic model closely mirrors that of the South-east Asian country in the last decade.
For example, both resource- scarce city states poured vast amounts of resources into aviation, transport, financial services and healthcare – sectors that will presumably boost the country’s development and attract plenty of foreign direct investment (FDI).
In Dubai’s case, its airport was pitched as a strategic stopover point between Asia and Europe, much like Changi Airport, while flag carrier Emirates sought to rival Singapore Airlines (SIA) by adding to its fleet of carriers, even in the face of the economic downturn.
Then there is the Dubai Aerospace Enterprise set up in 2006 to capture some airport development and operations projects in emerging markets, while Dubai Ports beat PSA International to buy P&O Ports for £3.9 billion (S$8.95 billion) in 2007.
Dubai, the world’s sixth-largest container port handler, wanted to run more terminals in China and India to tap growing economies and challenge rivals such as Singapore’s PSA International.
The Gulf state also challenged Singapore in the US$25 billion market for marine oil by setting up an exchange in 2005 to allow futures trading in marine oil at the port of Fujairah, one of the world’s top three fuel stops for ships.
The dizzying pace of development certainly represents a deliberate part of the ruling family’s strategy to transform the Gulf state into a world-class hub.
Construction spree
But beyond the similarities, key differences remain between the two, perhaps made all the more important when it comes to the crunch.
The first difference concerns the types of projects that Dubai has undertaken and the amount of debt it used to fund them.
In the past few years, Dubai went on a construction spree that included building the world’s tallest tower, the 818-metre-high Burj Dubai, and a man-made island called Palm Jumeirah.
Consider the amounts that was poured into those projects: The Burj Dubai building alone will cost an estimated US$1 billion, while US$1.5 billion was invested in the Atlantis hotel on the palm-shaped island. It is fair to ask if there is ever going to be demand for these projects, and will the tourist numbers be as claimed – a staggering 10 million hotel visitors annually by 2010. Or is it just mere hubris driven by the bubble of the past few years?
Of the US$99.6 billion worth of assets in Dubai World, close to 60 per cent or US$59.3 billion is leverage. With an unpredictable stream of cashflow, a long time horizon plus a debt-ratio higher than one, the credit crisis looks like an event that was waiting to happen.
In Singapore, state-owned Temasek Holdings started in the 1970s on a more solid footing by investing in infrastructure and providing basic services for the economy.
Temasek-linked companies such as SIA and PSA are in strategic sectors that are expected to do well in the long run, and the government investment firm certainly did not undertake any lavish property projects on the scale of Burj Dubai or the Palm developments.
Secondly, Dubai lacks a significant electronics manufacturing base that lends support to its export dollars, as the factory output accounts for just under 15 per cent of GDP. A look at the sectors into which it has poured its money (property, tourism, financial services, etc) reveals that they are all services-related – meaning that export flows can easily reverse in a matter of months, if not weeks. This inherently hampers Dubai’s ability to meet its short-term obligations especially in times of economic crisis.
Cushion
In contrast, manufacturing has been a significant contributor to Singapore’s economic growth for many years, and still accounts for about a fifth of economic activity here. This not only acts as a cushion for any downturn in the services sector, but the returns are often less volatile.
Indeed, Dubai represents all that was wrong with the pre-crisis financial world – built on hubris, loans, speculation, and the fallacy that the champagne-popping party could continue forever.
But, as the saying goes, all good things must come to an end. And the lesson from Dubai’s experience is this: without a development plan backed by fundamentals and prudence, even an oasis in the sand will end up as a mere mirage in the desert.
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