Why is the UAE always in recession?
For many years, the United Arab Emirates, especially Abu Dhabi, has defied the economic forces and continued to thrive even when other countries of its caliber succumbed to economic recession. This has been mainly due to the ‘build it, and it will be utilized’ strategy employed in the country. However, in 2008, the country was not spared. The economic recession that was experienced in most parts of the world was able to filter into UAE and into Abu Dhabi. This global economic recession was for the most part felt in the advanced economies as well as the emerging economies since they are generally the drivers of the global economy. Due to the integration of UAE’s economy to the world’s one, this crisis that had emerged from advanced economies was felt in UAE. All said, the economic depression was foreseeable by those in authority and could have been avoided if various appropriate measures were employed.
In 2008, the economy of the world fell into recession. Various factors were attributed to the recession; economists have given contrasting causes of the recession. However, experts agree on some of the main causes of the recession, and they include the imbalance in the world’s trade, the pattern of consumption in the United States, the financial markets being excessively deregulated, and the domination of the world’s market by the dollar. This recession not only exposed the bad practices that were prevailing in the financial markets, but it also interrupted the global growth of the economy that had been observed in the last twenty years. According to Jabeen & Katsioloudes (2011), the growth of the economy of the world decelerated from 4.2% in 2007 to 2.6 percent in 2008.
UAE is one of the countries with a high GDP per capita in the world; thus, this fact may be considered the reason why the country felt the pressure of the recession (Dobranksy, 2011). In addition, the output of various advanced economies decreased from 2.6% in 2007 to 0.9% in 2008. This recession also showed how the financial and monetary administration were reluctant to change the bad financial practices that were the part of the problem. Therefore, if such issues had been fixed, the weight of the recession would not be as heavy as it was felt. If the government had speculated such issues, then such results would be completely avoided.
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One of the areas that were affected by the global recession of 2008 is the financial sector. Particularly, the banking sector was affected, especially in its growth, due to its reckless lending practices; the monetary policies that had been put in place were loose, and thus, could not protect the sector from the recession, among other issues. If stringer banking practices had been put in place, then the recession results would have been minimal.
One of the most hit bank in the UAE was the Dubai World (DW). Dubai World in late 2008 made an announcement that it was seeking a halting of its processes. Besides, Dubai World was also seeking to restructure some of the debt that it held. These moves by the famous bank brought several ramifications. People were able to notice the volatility of the various markets as well as the support structures of the financial markets. In particular, the announcement by Dubai World that it was restructuring its debt subverted the commonly held opinion in both Dubai and Abu Dhabi that the government fully supported the bank. As a result, this event showed the volatility of the banks in Abu Dhabi, Dubai, and UAE as a whole.
The government also injected $32 billion into the financial sector in the form of long-term deposits (Iqbal, 2009). This was made in order to ease the pressure on the liquidity of the banking sector. From the above, it is evident that one of the sectors that were affected by the economic depression was the banking sector. If the government had put stringent measures and regulations to control the banking sector, then all the pressure felt during the recession would not be felt.
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The financial sector in Abu Dhabi relies on the dollar for most of its trading. Therefore, if the dollar fluctuates, then its effects are felt in Abu Dhabi’s stock market. If UAE did not have such a high dependence on the dollar, then the recession would not cause such devastating effects. In contrast to other developed countries, the stock market of UAE was worst hit by the economic depression (Ghorbel & Boujelbene, 2013). Since the start of the economic depression, UAE felt a great loss. Its overall stock market (Abu Dhabi) lost 45.7% in the period from September 1st, 2008 to March 18, 2009. The main reason why the stock market lost all this capital is due to the fact that the market is to a certain extent connected to the US Dollar (Habibi, 2009). Since one of the main causes of the depression was the bubble burst of the US Dollar, this also affected UAE’s stock market. The US dollar ‘bubble burst’ took place because the USA was consuming more than they had in their banks, hence being the main contributors of the economic depression. As a result, as long as the stock market in Abu Dhabi is pegged to the US dollar, the ripples of the depression were mostly visible in the region.
For Abu Dhabi, the background of economic growth and diversification is the formation of capital. Fixed investments are therefore the factors that support the national economy and help it to be what it is. Formation of capital reduced because of the problems in the banking sector and people spending more than they make using credit cards. These bad lending habits of the sector resulted in the need of some banks to restructure their debt and lending policies. Therefore, people could not borrow from the banks to invest. The formation of fixed capital diversifies the added value of products and services; it also leads to the technological content of these activities being developed.
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In 2008, there was a decrease in the formation of fixed capital in Abu Dhabi. Since revenues got from the sale of oil and its products are the greatest contributors of fixed capital used as financiers of social and economic development, fixed capital is, therefore, directly affected by fluctuations in oil revenues (Samba Financial Group, 2009). Oil revenues during the economic recession decreased, and as a result, the fixed capital also dropped. Capital formation was reduced by 8%, from 18% in 2008 to 10% in 2009. This means that the development in Abu Dhabi reduced during the economic recession. Consequently, the government could have done better in regulating the banking system so as to ensure that the capital creation was not affected.
In contrast to the above arguments, putting regulations on banking systems or not having a high reliance on the dollar would not have much effect in preventing the recession in Abu Dhabi. This would happen because the recession was global. In other words, the borrowing ability of all countries in the world was affected; thus, trade or revenues from other countries would be hindered even if the right measures had been put in place by the authorities. Again, apart from trade, Abu Dhabi’s sources of revenue include tourism, and real estate. These two sectors of the economy were worst hit by the recession globally since due to the bad spending habits of the people in addition to the bad lending habits of the financial institutions, people had less money to spend. Less liquidity in the economy as a result of the collapse of various financial institutions is the factor that caused the lack money to spend in these sectors. Therefore, less tourists visited Abu Dhabi, and the real estate industry also had not so many buyers. This means that even if more efficient regulations had been put in practice, recession would have still occurred in Abu Dhabi. However, employing such regulation by the government could have gone a long way in reducing the recession in Abu Dhabi.
In conclusion, the economic recession that happened in 2008 was felt by most countries globally, and UAE was not an exception. Specifically, the emirate of Abu Dhabi experienced the effects of the recession. Several factors caused this global economic recession including the domination of the world economy by the dollar, the excessive deregulation of the financial markets, the trend that the United States had taken when it came to consumption, the imbalance in the world trade among others. This situation revealed how the various sectors of the economy were not ready for such turn of the events, and hence, they were affected negatively. If the government had put the necessary measures in place, then these effects would not have been felt so intensely.