Has the bubble burst?

Excerp from The Economist..

As the sheen comes off glitzy Dubai, the other Gulf states are getting nervous too

"THEY said you couldn't create islands in the middle of a city," shouts a property advertisement over a jammed Dubai motorway. "We said, what's next?" The range of answers has become gloomier by the week, as the debate moves from whether the Dubai property bubble will burst to just how bad it is going to get.

Some nervous bankers think property prices could fall by 80% or so in the next year or so. A few months ago, rich foreigners who had bought villas in Dubai were complaining about the quality of the sand on their artificial beaches or the difficulty of getting water to circulate around the twiddly fronds of the man-made island shaped like a palm. Now prices for some smart developments have been cut by 40% since September, shares in property firms have lost 80% of their value since June, and big developers are laying people off.

The region's banks will suffer too. Gulf policymakers are still making cheery statements about the region's limited exposure to subprime loans but are quieter about heavy investments in inflated local property markets by regional banks, particularly Islamic ones. But worried banks are sharply reining in their mortgage lending. A series of arrests of senior businessmen as part of a fraud investigation is also making people twitchy. There is even talk of a coming "Gulf Enron".

While the stunning opacity of government economic data is increasing the air of uncertainty, Muhammad AlabbarMuhammad Alabbar, who heads EmaarEmaar, a giant state-controlled property developer, took the rare step of telling people how indebted the country is. Together, the government and state-owned enterprises owe $80 billion--148% of GDP. Dubai still has a far larger stock of assets, at least some of which are likely to be sold, to cover the debts, to Abu Dhabi or the federal sovereign-wealth fund of the seven-state United Arab Emirates, of which Dubai and Abu Dhabi are the two richest.

The rest of the Gulf has met Dubai's phenomenal boom with a mixture of envy and emulation. Now there are hints of pleasure at the idea that the epicentre of bullishness may be humbled. But there are worrying questions for the others, too. Could the Dubai property slump prove contagious? Will the Gulf Co-operation CouncilGulf Co-operation Council pull together to protect the region's economy? Should its planned monetary union be set aside as governments focus on protecting their own currency? Who do we listen to now?

Since everyone else has been trying to copy Dubai, it is unclear how economic policy should be reshaped if the model has to be rescued. Advisers who have been preaching free markets and foreign investment will have a tougher time as economic power shifts back to the more conservative, oil-rich governments such as Abu Dhabi and Saudi Arabia.

Political stability may be affected too. A worsening economy may encourage political reform, on the assumption that people can be more easily bought off in times of plenty. At a recent BBC debate in Doha, Qatar's capital, on whether Gulf Arabs value profit over people, young Qataris said critics of their countries' poor treatment of foreign workers should look on the bright side; local citizens benefit from large gifts of land and free university education. Since the oil boom began in 2003, mega-rich Qatar has ramped up public spending by an average of 28% per year; the less well-endowed states have had to make do with annual rises of some 15-20%.

Several GCC economies will go into budget deficits next year for the first time since at least 2002, including Saudi Arabia, whose budget is based on oil at around $50 a barrel but excludes the cost of Saudi Aramco massive programme of capacity expansion.

Unemployment will rise as thousands more young people, many of them graduates with high expectations, enter the job market. Social unrest is likely to brew. The question is whether governments will meet it with repression or political concessions.
© The Economist 2008

Layoffs Mount In Dubai Property Sector

DUBAI (Dow Jones)--Layoffs are mounting in this city-state's property sector, with one of Dubai's most ambitious government-owned developers announcing big job cuts Sunday.
Dubai-based developer NakheelNakheel said Sunday it shed 500 jobs, or 15% of its workforce. In a statement Sunday, the company said it was scaling back work on its projects "to accommodate the current easing market conditions."

"We have the responsibility to adjust our short-term business plans to accommodate the current global environment," the statement said. The company didn't specify where the job cuts were being made or which projects were being scaled back. The company previously said it was looking at slowing work on one of three palm-tree shaped island developments it is building.
(This story and related background material will be available on The Wall Street Journal Web site, WSJ.com.)

Also on Sunday, Morgan Stanley (MS)Morgan Stanley (MS) said it had let go of 10-15 staff from its roughly 110-person Dubai office. The banking layoffs come just months after several big Western banks started beefing up their staff here. International banks had hoped to mine the region for deals and fees that have become hard to come by almost everywhere else in the world.

And last month, another big developer Damac GroupDamac Group, said it was shedding 200 staff, or 2.5% of its workforce.

A layoff in Dubai can be much more problematic than in other places. The United Arab Emirates has a population of 4.4 million, but less than 20% are estimated to be citizens. Expatriates do most of the work - filling everything from low-paid construction jobs to midlevel and senior management positions. Expatriates are required to find new jobs within a month or leave the country.

Dubai authorities are looking at options to extend the grace period for expatriate employees that lose their jobs before they're forced to leave, a senior government official told Zawya Dow Jones last week.

While the oil-rich Persian Gulf once appeared protected from the financial turmoil swirling around it, a number of factors have combined to cause real pain for governments and companies in the region. Falling oil prices mean lower revenues to pump back into the economy in the form of big infrastructure projects. Banks have been cut off from foreign borrowing lines amid a global credit seize-up, making lending difficult. Meanwhile, in Dubai, the once-red-hot property market is weakening.

Analysts at HSBC Holdings PLC (HBC) said prices had fallen 4% in October from September, the first drop in the six years the market has been open to foreigners.
(END) Dow Jones Newswires