A year ends with questions, and hope

The year began with a bang, and it's ending with one, too. In between there were fireworks aplenty. Coming into 2009, something akin to panic gripped the UAE, the rest of the Middle East and almost everywhere else. Many employees, property owners and investors might have accepted short odds against the world coming to an end before the year did.

With a few weeks to go, it looks as if the world will make it all the way through. As recent developments have made clear, however, the stability and prosperity that seemed to be re-emerging over the summer - exemplified by a moon-shot recovery in share prices - remain somewhat out of reach. Even more so after events of the last month. In late November Dubai World, an emirate-owned holding company for various commercial enterprises, asked for a six-month moratorium on payments on US$59 billion (Dh216.7bn) of debt used mostly to finance the building boom of the previous decade.

That sent stock markets plummeting around the world, and especially in the UAE. Dubai suffered the most, naturally, but Abu Dhabi also fell substantially. With default fears heightened dramatically, interest rates soared on bonds issued by government-controlled entities in Dubai. They ebbed somewhat after Dubai sold $5bn of bonds to a pair of Abu Dhabi banks and after Dubai World said that it was seeking to restructure debt of certain subsidiaries totalling $26bn, less than half of the original amount, and that the rest of the company was on "a stable financial footing".

Stocks erased a portion of their plunge in the days following the moratorium announcement and rose further on Monday after Abu Dhabi lent Dubai World $10 billion. That has enabled the company to pay $4.1 billion due that day on bonds issued by its Nakheel real estate subsidiary. Selling in the stock market had been sufficiently relentless in previous weeks to wipe out all of the gains that the Dubai Financial Market General Index had recorded since the start of the year. The more hopeful recent developments sent it back well above the line; at the close on Monday the index was up 14 per cent on the year.

The ADX General Index in Abu Dhabi had an 18 per cent gain over the same period. Both indices remain well below their mid-October peaks, however. The ADX had been up 35 per cent since the start of the year, while the DFM had enjoyed a gain of 45 per cent. The strong performance over the spring and summer was achieved amid awful corporate results. Buyers were willing to overlook the fact that third-quarter earnings for UAE companies were barely half of what they were a year earlier because they believed that the worst of the debt crisis was in the past, said Kristian Overend, a partner at Killik & Co, a British brokerage firm with offices in Dubai.

"Much of the improved sentiment on the UAE bourses during the third quarter was [due to] the assumption that . . . successful debt repayments and refinancings were likely to allow companies to trade through the economic downturn and grow earnings from the second half of 2010 onwards, mainly through margin expansion and [revenue] growth once the economy had stabilised," Mr Overend said. Recent events have called that assumption into question, and they appear to have made equity investors less likely to ignore other adverse developments, including one that hit them where they live. Residential property prices in Dubai, which were slow to join the decline experienced in much of the world in 2008, caught up in a hurry.

The emirate's real estate market led the race to the bottom this year. The 47 per cent drop in the 12 months through September, which occurred despite a 1.2 per cent rise in the third quarter, was the worst showing of any location followed by the Knight Frank property consultancy. The plunge coincided with expanding unemployment. The recruitment firm Gulf Talent estimates that 16 per cent of professionals working in the UAE lost their jobs this year, more than in any other Gulf country. Job losses amounted to 10 per cent across the region, the firm said, with expatriates and senior executives more likely than others to be affected.

As was true last year in the United States and elsewhere, the seeds for the financial crisis in Dubai were sowed years earlier when easy credit was extended to developers and other participants in the property market. That led to overbuilding followed by the sagging prices that have left many borrowers unable to pay their debts, an anxious banking system and a government rescue. A key event in the effort to halt or at least manage the crisis was the purchase by the UAE Central Bank of all of a $10 billion bond issue floated in February by Dubai. The proceeds were disbursed to various state entities to help them repay debts or finish construction projects and to try to alleviate the logjam in the financial system that had made new credit scarce.