For UAE’s ‘black swan’ event look to China rather than the Dubai fire or Saudi-Iran

Reader feedback is always welcome for a columnist. It shows you are, at least occasionally, hitting the sweet spot on issues of public concern.

One of the best “postbags” this column has attracted came at the beginning of last month. Based on an insightful conversation with a leading investment banker, it focused on the potential threat to bank liquidity – the availability of cash to lubricate the financial system – from “black swan” events in the UAE.

The banker’s reasoning was that low oil prices, budgetary pressure and declining world economic prospects left regional economies – and that of Dubai in particular – susceptible to big surprises and sudden discontinuities: what were once called “unknown unknowns” in global affairs.

The banker thought a further dramatic collapse in the oil price, or a security incident, in Dubai could be the “black swan” event that might derail the emirate’s otherwise relatively sanguine economic outlook, with the potential to spark a financial emergency along the lines of 2008.

The reader response was all about one question: what were the other possible “black swan” incidents that could have the same effect? Surely, because we are all well aware now of the oil price issue, and the potential security threat, these did not qualify as “black swans” at all. What else was there that might destabilise Dubai’s comparatively stable economic outlook?

Well, in the past few days we have seen at least two, possibly three, events that have that potential. They serve as a reminder that “black swans” are so significant purely because they are so unpredictable.

For a while, it looked as though the fire at The Address hotel on New Year’s Eve carried that kind of threat. For an agonising couple of hours, the origin and scale of the conflagration was uncertain, as were the extent of casualties.

Thanks to the remarkable efforts of the Dubai rescue services, none of the worst fears was realised. But inevitably there will be repercussions. Emaar, owner of The Address, says it is insured for a refit or rebuild, but it will have to forgo the revenue from its flagship Dubai hotel for some time, knocking a significant 13 per cent off turnover in the current year, according to analysts at Arqaam Capital.

An investigation by this newspaper showed that Dubai also faces the challenge of reassuring businesses, tourists and residents that the other tower blocks in the emirate are safe, especially those built before 2013.

The bill for that is unquantified, but could easily run into billions of dirhams, which will not be easy for developers or the authorities to find in the current climate.

But despite the potential future costs, the Address fire was not the dreaded “black swan”. Another turn of events – the increasing regional instability as a result of worsening relations between Saudi Arabia and Iran – has more “black swan” potential for Dubai.

It’s virtually impossible to predict how this will work out. Heightened tensions leading to a serious conflict would of course be bad for regional business everywhere, but for Dubai in particular. The emirate has been widely regarded as the leading beneficiary of the “peace dividend” expected to come in the form of increased trade with Iran as international sanctions are lifted. But at the current time, it is difficult to see any UAE business pushing enthusiastically for business opportunities across the Strait of Hormuz.

On the other hand, regional tensions might lift the oil price to healthier levels, an important “feelgood” factor for Dubai. It should also be pointed out that the emirate, after an initial shock, has survived and even prospered in past regional crises, wars and financial upheavals.

So Saudi-Iran is not necessarily a “black swan” either. But a far more threatening beating of wings can be heard from the east, and this has real potential to throw plans off course in the UAE.

Two days of rout on the Chinese stock exchanges, with main indexes down by about 7 per cent, followed fresh evidence of the fragility of the country’s domestic economy. UAE policymakers, especially in Dubai, have hitched their wagon so firmly to Asia, and China in particular, that a downturn in that country would have serious consequences for trade, transport and tourism, the basic elements of Dubai’s economic strategy.

Forget The Address, keep a watch on Saudi-Iran, but do not take your eyes off China, the black swan in the living room.

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