Recession: Will the U.A.E. Withstand the Storm?

A Forwarded Email

Here is recession explained in simple terms. I found it in a local website.

It seems like a lot of people have forgotten what happens in a recession. There are some historical facts to look at but a lot boils down to a chain reaction of what people do in every recession.

Therefore, here is a short explanation of what happens in a recession:

When you are in recession is determined by the country’s potential negative growth. How a government actually determine you are in a recession is different in different parts of the world. In Europe , the general clause is you have two quarters (6 months) with negative growth. The US government itself decides after some time if it is in a recession or not, and have last week announced the U.S. has been in a recession since Nov. 2007.

What can happen?

1. Interest rates falls as governments try to improve available money in the market. The access to money is a key factor in recession management. This has an adverse effect on the currency, since people do not want their money in a country with low interest rates, so they “sell” their Dollars and move into another currency that offers higher Interest rates (and seems stable) Many has seen Swiss Francs as a safe haven, so very often downturns, you will see the Swiss Franc increase.

2. People get scared and move their money from the stock markets into government bonds or metals and some even under their pillow.

3. Share prices starts to drop, on expected lower earnings from companies. If you monitor companies P/E (Price/Earning) values, you will see P/E going towards 10 and below, but that is because the E (earnings) part of P/E is expected to lower dramatically. However, when you look at P/E – the Earnings is a HISTORICAL figure, not a future figure. Therefore, future “E” will be a lower number, resulting in a HIGHER P/E value again. So don’t just buy a share because P/E seems low.

4. Real estate markets plummet – both for rentals and for sales properties. People lose their jobs and can no longer afford the property they are in. They will move to smaller properties if possible, putting very high pressure on “High End properties” for middle income families.

5. Unemployment will start to increase. First at a slow rate, then later at rush rates.

6. People and companies will start saving money and not spend as much.

a. That fuels P/E rates upwards – due to lower earnings for companies

b. It makes even more people unemployed

c. People will not buy as much gasoline or oil – resulting in lower oil prices.

d. People will move to cheaper residences either because they have less available income.

e. Governments won’t get as much money in sales taxes and other consumption based taxes.

So all in all a vicious cycle, that is self-amplifying. The more consumers save up their money and the fewer products they buy, the more the economy will suffer.

Will U.A.E Weather the Storm?

So how does a typical recession scenario compare to Dubai and the U.A.E.? And what can the U.A.E. do to minimize the impact?

1. Interest rates in the U.A.E. have sky-rocketed as banks have seen loans and mortgages as high risk – making LESS funds available to the consumers and companies, fueling the risk of recession in the U.A.E. – and stopping the real estate market. This reaction is hurting the market a lot.

When a bank sees a loan as high risk, they increase the Interest rate. When Banks can see low risk, they have lower Interest rates. Banks also increase the “spread” between what you get when you deposit money in the bank and what you can borrow money for. A low spread between deposit interest and loan interest is equal to a secure market. The larger the spread, the more the Banks are scared of the future.

So the U.A.E. needs to get the Interest rate down not to amplify the risk of recession here and make money available for the consumers and real estate market.

2. People travel less in a recession. Since 17-22% of Dubai GDP is based on tourism, the impact here will be harder than in a country where only 5-10% of GDP is based on tourism. Tourist based economies are some of the hardest hit in a recession.

Tourist destinations must change their approach to get people to the U.A.E. Lower prices, better offers, more “value” is essential for attracting the visitors who now have a smaller budget to travel for.

3. When people lose their jobs, they spend less. But in the U.A.E. when people lose their jobs, they also risk losing their visa, forcing them to leave the country within 30 days of visa cancellation. So hardly enough time to find a new job in a market downturn. So in the U.A.E. spending from unemployed will not just be less – the spending will completely disappear, leading to more people losing their jobs.

So losing your job in the U.A.E. and not being able to find a new one before visa cancellation leads to:

1. You have to get out of your flat/house. If you paid 12 months up front for a rental property, you don’t might not get any money back. You might have to sell your house if it did not come with a residence visa and you can’t afford to keep it without a job.

2. You need to sell your U.A.E. possessions, like cars, TV, boats, furniture etc.

3. You need to settle credit card bills, Electricity and Water, Phone lines, TV, Internet, and all other bills you might have BEFORE you check out of the U.A.E.

The above will lead to even lower prices on property, lower prices on 2nd hand cars, lower prices on all other 2nd hand items.

And since you are under hard time pressure to get rid of your assets – you will be forced to sell at any available price you can get.

People with cash are kings in a recession.

So in short – losing your job in the U.A.E. can be a disaster for your personal life and can leave you with a lot of debt. But it will also impact the U.A.E. in a bad way.

And since an estimated 15% of tourists to the U.A.E. are relatives and friends coming to visit YOU – and spending money in the U.A.E. economy, these visitors might be lost, impacting even more.

So this is an even more vicious cycle than a “normal” recession and if nothing is done the potential recession can hit the U.A.E. harder than the western markets, despite the government having plenty of money.

To stop the outflow of people and local revenue, the visa rules need to be changed in the U.A.E. or we can face very hard consequences for the local economy.

There shall be downfalls, but they won't destroy totally...

Click here to read full message.