Is Dubai Another Bubble or a Hong Kong in the Making?

Dubai has opened up its economy. The crown prince of Dubai has, for example, finally allowed 100% freehold interests in certain properties there. The government has also created free-trade zones, where there are exemptions on import/export duties, no personal income taxes, no restrictions on the repatriation of profits and 50-year exemptions on corporate taxes. In essence, it has created a sort of free market oasis. These efforts are paying off.

Late last year, at a lavish party celebrating the Dubai International Financial Center’s anniversary, its director, Omar bin Sulaiman, declared that the Middle East’s time in the “financial wilderness” was over. Looking at Dubai, it is hard to argue with him.

Numerous financial services companies and banks are opening offices here. Morgan Stanley, HSBC, Credit Suisse and others are planning, or have already opened, full-service operations in Dubai.

The domestic stock markets are hopping. Over $3 billion has been raised in Middle Eastern initial public offerings in 2005. Bond issuances have tripled in two years. Further evidence that Dubai is attracting global wealth: Of the nearly one million residents in Dubai, about 80% of them are expatriates.

Oil still accounts for about a third of the economy in the United Arab Emirates, but travel and tourism contributed 11% in 2005, and that number is growing rapidly. International tourism to Dubai went up 9% in 2005, to 5.5 million tourists, and is expected to triple by 2010. Dubai has a good infrastructure, including a world-class airport — Dubai International — that’s one of the busiest in the world. Over 20 million passengers walked through its turnstiles in 2005. Traffic has grown at a compounded annual rate of better than 13% over the last 10 years.

The projects in the pipeline are staggering: More than $30 billion in construction projects, nearly all of them in the next five years. These projects include a mix of business and leisure properties, as well as infrastructure projects.

Dubai takes luxury to another level. Their hotels are like the cathedrals of the previous centuries; their shopping malls like monasteries. They are their signature architectural works. They stand as monuments to human craftsmanship and material progress.

Foreigners are the main feeder for the Dubai hotel market, particularly Europeans. But the Arab world figures prominently, too. Arabs make up nearly 40% of the total demand for hotels.

The fact that Arab wealth is heavily involved in Dubai is particularly important. To say the Arab world is not known for its stability would be an understatement. As David Ignatius wrote recently in The Daily Star: “Every Arab investor in Saudi Arabia, Kuwait and Qatar has to worry that Islamic fundamentalists will someday upset the money machine — and in anticipation of that disaster, they all want somewhere to run.”

Dubai is their chosen safe haven, “the Arab world’s ultimate gated community.” Far from a target, the powers that be will protect Dubai, because it is where they park at least some of their own wealth.

But as the wise old sages advises, never trust prosperity. Just when you think things are going swimmingly, along comes Fate to put the kibosh on things. In fact, Fate seems to relish the opportunity to slip one the ol’ banana peel and give a kick in the pants.

Is Dubai just another bubble? It could be. But it could also be another Hong Kong or Singapore in the making. Given the wealth in the region, and the increasing hostility of large governments (including the United States) toward business, such safe havens will be more important than ever. At least for the next several years, Dubai looks pretty good to me.

Chris Mayer
For Markets and Money

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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allyson rowen taylor

The issue of Dubai is one that cannot be overlooked. Sharia Law, theocracy and Jihad. We are all fools thinking that big money, glitzy hotels, and big shopping malls are a safe haven for any democracy. Buyer Beware, as this is only the beginning of the end of democracy

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