Impact of the developed world meltdown on the Middle East

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The entire world's financial order has undergone massive changes in the past few months and continues to evolve. The developed world is in the midst of a meltdown; a situation arising from unsecured mortgage lending in the United States. It has now blown into a terrifying global crisis - a crisis of confidence!!

Trust is always an important aspect of conducting business and today that trust has been replaced by fear. The spreading anxiety of the safety of one's money has led to fear among banks, depositors, politicians and working people with no immediate solution to the problem.

The fear of borrowers defaulting has tightened the entire banking system. Banks have cut back on their lending to individuals and businesses, they have stopped offering mortgages and car loans, and many have made it tougher to source a loan. The financial meltdown has had a detrimental impact on customer sentiment and drained liquidity from the system. This has led to a wait-and-watch approach from end-users.

The developing world is not immune to the crises, due to the 'domino effect' of fear and lack of confidence in the developed world. Specifically talking of the Middle East, the crisis has severely reduced GCCGCC cash surplus and is affecting plans to diversify economic growth beyond the oil sector. The global conditions are likely to slow the region's economic growth, but not destroy it. An orderly restructuring of finances and proper consolidation will help rebuild the lost confidence.

GCCGCC countries have undergone an unprecedented economic boom in the past five years. Four months ago, oil prices were at US$147 a barrel and oil rich countries poured large sums of that additional revenue into construction and infrastructure projects making the region one of the fastest-growing destinations in the world economy.

With the developed world meltdown, the pace of growth in fast developing countries in the region is inevitably coming under stress. With oil prices at below $50 per barrel and property prices taking a fall, there are many who would think that the Middle East cannot continue to grow in this climate.

Dubai property prices have softened and likely to go down further -with growth slowing down to nine per cent from 13 per cent according to official reports. On the other hand, Abu Dhabi has reiterated that its real estate sector will remain immune to the global downturn. Qatar continues to remain the hot spot for luxury property while Bahrain has said that its real estate prices could fall as much as 25% in 2009. These reality checks have been attributed to shortage of liquidity caused by the international financial crisis, the stock markets' negative wealth effect, rising concern of job security as also the reduction of mortgage loan-to-values by banks in the region.

But let us take stock - underlying demand for property in the Middle East is still strong compared to other parts of the world and companies will continue to want to do business here. In Dubai alone, the predicted shortfall of residential property supply against demand in 2009 will be around 125,000 dwelling units.

Confidence, and in turn trust, needs to return to the market and this will only happen when banks and financial institutions step up and start to lend money again. Regaining trust, building confidence and eliminating the fear inherited due to the global crisis is very important. Therefore how we deal with these issues over the next six months is the key.

The Government of the UAE knows this and has moved to allay fears in the banking sectors with guarantees for investors. Measures such as pumping liquidity in the banking system, introducing end-user friendly payment plans, establishing investment funds and task forces, clearly showcase the government's commitment to better manage the credit crunch.

In addition privately-owned companies like ours have offered property rental guarantees to investors for the next three years. We need to show confidence to build confidence. Expectations that the mortgage rates would soften from their present high levels offer some respite to buyer sentiments. The cooling-off of the real estate market is definitely good news for the end-users. Though the scepticism over the market movement is palpable now, it will be short-lived. Speculative buying has almost stopped and the long-term sustainability depends on an end-user-driven and oriented market.

Let's face it: the region is experiencing signs of slowdown for the first time - something which we are not used to - but we are still in control of our own destiny. In the absence of clarity, wild rumours are flying at lightning speed and damaging consumer confidence. We need to take corrective measures now, trim fat if needed and be ready to launch ourselves forward in the second half of 2009. It is not too late to take action.

-Ends-

By Peter R Riddoch, CEO of Damac Properties

© Press Release 2009