This article presents a few quick pointers about Dubai and what I believe is going to happen over the next few years.


1. The size of Banks in UAE in terms of assets is about AED900 million, and the for the past five years it has been growing at the rate of about 35% per annum (which is extremely high by any measure), and the total deposits is about AED700 million. Even though it is claimed that total exposure to real estate by banks was less than 20%, I believe that through indirect way of passing the money to real estate, the real number should be about 60% of total assets.

2. I do not have figures in terms of liquidity that has flown out of Dubai over the last 3 months, but a figure of AED100 billion shouldn’t be too far off. If trends continue this is the exact reversal of monies coming in over last 5 years of about AED100 billion per year. This was pretty much met by the liquidity injection of UAE central bank of about the same figure. So I would expect another AED100 billion outflows would probably be not that far fetch, over the next 1 year or so.

3. Therefore, by any score, liquidity is extremely tight; as banks can’t liquidate their assets that fast, and assuming that no new deposits from external to come in over the same period of time. This means that another large sum has to be injected by the central bank sometimes soon.

4. My assumptions about the property (of ready made type) prices is that it will go down by about 20-30%, over the next three years; and the same time the existing exposure by banks means that loan loss provisions will have to start to come in. At the same time most of the loans are short term in nature, which means many will need refinancing or else the defaults will start to happen. In any case, dropping prices and defaults will cause severe strains on the banks as not only income has dropped, but also provisions have to be made.

5. Eventually, banks have to be capitalized to meet minimum capital adequacy of 12% of assets. Based on exposure to properties about AED500 billion, a write down of about 20% means bank have to raise about AED100 billion capital. Total capital today stood at about AED200 billion, which means write of about AED100 billion.

6. I expect that banks will have to merge, as the recapitalization entails smaller and weaker banks have to be absorbed by bigger and higher capitalized, and stronger shareholders. Therefore, do expect waves of mergers and takeovers to happen. Probably the total number of local banks will be reduced to somewhere less than 10 banks.


1. The total size of property (existing or under construction – not including that are being planned) is about AED600 to 700 billion. About half of them have been completed, while almost half are under some stages of construction.

2. This would means that Dubai needs about AED300 billion of cash to complete these projects. From where the funding will come from? Traditionally it was financed by two sources, banks and buyers (purchasers/investors/speculators). Banks, as I have explained above is totally tight with liquidity and already over exposed. They won’t be able to help. How about the buyers? They are literally gone!

3. So from where Dubai can raise the AED300 billion? This is the billion dollar question that remains hard to answer. They are in desperate needs to raise the cash. There are only a few options available for now: a) Sell assets (who want to buy?) b) borrow money from abroad (who want to lend?), or c) raise money internally (Do they have the means to do it?)

4. They can offer to sell some assets to Abu Dhabi, which can be feasible. But I don’t expect that will raise much. A figure of AED100 billion sounds feasible. They can’t borrow money from abroad, as the total existing exposure to external borrowing is already somewhere in the range of about AED80 billion.

5. Furthermore, as the banking crisis is unfolding, there has been a total collapse of lending markets globally. And lastly, Dubai is not a country, which can raise money by issuing government debts and hence enable it to fund by this method, neither it has oil to support such exercise. This leaves Dubai very little room to raise what is needed to complete the existing projects that it has.

6. This brings us to conclusions that even the so called current and ongoing projects have to be scaled down and deferred to a later date. The best thing to do is consolidate and use cash sparingly in order to have an orderly program. This off course requires a humbling down of people and accepts the reality of the problems. This is something that is within reach and much wiser approach than to continue with arrogance and denial of the issues.

In summary, total capital Dubai would require looks something as follows:

1. Recapitalization of banks: AED100 billion or so, depending on whether they want to hold on to their banks

2. Capital outlay for existing projects: AED300 billion, depending on the size that they want to continue.

3. Repayment or refinancing of external borrowings: AED200 billion or so, depending on date of maturity.

4. That brings the total to be somewhere between AED300 billion to AED600 billion. It is a very large sum by any count, given the current global scenario. Some hard and very painful decisions have to be made, sooner rather than later. The more time taken to delay decisions, means more money wasted in the meantime, and some are irreversible decisions.

If any lesson from Malaysian crisis of 1997/1998 to be learned: UAE and Malaysia are about the same in terms of GDP size. The size of banking system is also comparable, and the numbers of banks are also of similar situation prior to crisis. The size of banking problems it seems to me is also quite similar. Malaysia was exposed to two major sectors, the share market and the property/construction sectors in about the comparable proportions.

Malaysia (Mahathir) was in denial for about one year before the capital control was imposed. The market was battered too long until there is no energy left in the system and people. It will be few years later then only restructuring started to take place. With benefit of hindsight, I believe many more things should and could have been done to avoid or reduce the damages. But then it was never too late than never. But can Dubai take lessons and try to avoid certain pitfalls?

Malaysia and South East Asia finally export out it problems by way of increase exports (since global economy was still running). Malaysia also retuned its budget and consolidates its banking system. Finally it manages to stabilize and started to grow again, albeit a much slower one.

As in any crisis, we have to take a few steps backwards to move forward again. Dubai may have to do the same thing if it wants to come back stronger again. The question left is the will and commitment to do so.

End notes: All the figures that I have included above are rough estimates. I might be off by some numbers (say AED50 billion –plus or minus). Honestly it does not matter, since I do not meant to be accurate to the dot, as the whole intention is to give the sense of magnitude of the issues. Most of these figures are available publicly and from UAE Central Bank.


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