The Middle East escaped the brunt of the September 15 global meltdown; the subprime securitization lesson is one that should be well heeded. The US and the UK paid big for giving credit where credit wasn’t due and will be picking up the pieces for some time to come.
The Gulf should not face this problem. The banking sector can control local credit, which, unlike the US, is still awarded on a strict merit basis, while outside investment, say from Russia or the Far East should, by and large, not present that much of local problem should a major default occur. The risk, should there be one, lies in the uncovering of any creative financing instruments — the ones that are tied to a financial hair-trigger — that we still don’t know about and which might, like a nasty jack-in-the-box, pop up and surprise us on an idle Tuesday afternoon. For one thing is certain, the relatively young Gulf markets and the Gulf regulatory bodies are untested in dealing with any financial crisis let alone a tsunami such as the one that hit the US and UK banks.
Talking of property, Dubai may soon find itself in a bit of a mini pickle. Quite simply the town has become too expensive to live in for people, who would, quite reasonably, expect to be able to. Rent or mortgage repayments are normally calculated at one third of a person’s income and the sad fact of the matter is that Dubai rents are out of sync with salaries. This is due to an oversupply of one type of property developments and a lack of what we might call “regular” homes.
The astronomical rents have already had an impact on a business community unwilling to move out of the center and face the daily nightmare of commuting. While some companies are consolidating, others are scaling down their back office operations, keeping only vital front of house staff because the town is simply becoming too expensive to keep them there.
We may have escaped one storm; let’s just pray another is not looming on the horizon.
