Thursday, March 08, 2007

Dubai: on the one hand and on the other :: Brad Setzer's Web Log

Some quotes (emphasis is mine):
The Gulf is not just flush with money – it is now filled with the bustle of loads of new activity.

I don’t buy all the hype coming out of the Gulf though: the arguments about diversification seem a bit overdone. The Gulf has diversified from pumping oil to pumping oil, refining more of the oil locally and using more of the region's gas to support a petrochemical business. All that makes a lot of sense, but it is still derivative of the core hydrocarbon business. And I am not sure that spending oil dollars on construction is real diversification. If the oil money dries up, so does the construction.

The common argument that the current boom in the Gulf is different than past booms because it isn't just based on a surge in government spending also strikes me as somewhat over-stated.
Moreover, massively negative real interest rates (Dubai's inflation is around 20%-- per Serhan Cevik of Morgan Stanley -- while nominal interest rates are around 5% due to the dollar peg) encourage lots of private investment. Some of that may not yield a positive economic return once financial conditions return to normal.

On the other hand, I am not so sure that diversification is quite as necessary as is often argued. It kind of depends if oil is going to stay around $60 or fall back to $20. If oil is around $60, some Gulf states have enough oil and gas relative to their native population that they really don’t need to diversify – not for a long time.
Setzer quotes Roach (my emphasis):
Based on industry sources, 26.8 million square feet of office space is expected to come on line in Dubai in 2007, alone -- more than six times the peak rate of completions in Pudong in 1999 and nearly equal to the total stock of 30 million square feet of office space in downtown Minneapolis. Based on current projections, another 42 million square feet should come on line in Dubai in 2008 -- the equivalent of adding the office space of a downtown San Francisco. There is one obvious and critically important difference between these two urban development projects: Pudong has an indigenous support base of 1.3 billion Chinese citizens. Dubai’s current population is 1.3 million. Throw in the entire native population of the UAE and the support base is still only around 4 million domestic citizens. That's right, a region with less than 0.5% the population of China is out-building the biggest construction boom in modern Chinese history.
Actually, the number of domestic citizens is around 2 million. The total population is 4 to 5 million. The difference between China and the UAE is that the UAE - seemingly - is prepared to admit as many people as are required to fill the buildings.

Thanks to Newmark's Door for the link.



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