Investment: Dubai risks a post-expo hangover

"The government just takes the money and there’s no one here to help us. After 2020, people may have to leave very quickly,” Abdul, a driver at a private car company in Dubai tells Euromoney.

Abdul moved to Dubai from Sargodha, Pakistan in 2009 in hope of finding a better-paid job, but like many of his peers he is finding it tough to navigate Dubai’s economic slowdown. Despite falling property prices, Abdul’s rent has almost doubled in the last 10 years, while his costs of living are also going up. 

Work is plentiful at the moment, and he expects to be busy throughout the six-month run of Expo 2020, the international mega event on which the government of Dubai is pinning hopes for an economic revival. But our driver thinks once the expo is over, jobs will dry up and people will leave. 

Abdul’s concerns reflect those of many in Dubai who worry that the economic boost caused by the government’s vast expo-related expenditure and ambitious infrastructure programme will not be enough to cement Dubai’s transformation from a traditional to a future economy.

It is just over 10 years since the real estate bubble burst in 2009, leaving buildings standing empty and cars abandoned as workers fled the emirate. 

Today, oil prices remain closer to $50 a barrel than $100, property prices are cratering – although building continues seemingly unchecked – bank lending is low and UAE economic growth is estimated to have slumped to 1.7% in 2019. 

But Dubai has a very real opportunity to crystallize its plans for economic diversification, to cement its position as an investment destination and to accelerate growth in its all-important small and medium-sized enterprise sector.

Expected to bring Dh122.6 billion ($33 billion) to the UAE’s economy between 2013 and 2031, Expo 2020 is big business for a city that has made its name building dreams in the desert. 

Splashed across billboards, flag carriers and central to the government’s 2020 budget, it is clear that the government sees the expo as an essential stimulus to its ailing economy. 

But the success of Expo 2020 will not be found in the estimated 25 million visitors, the numerous cultural events or corporate showcases, but in whether or not it can secure a meaningful long-term legacy that creates jobs and true economic diversification. 

Peeling back the glossy layers of Dubai’s diversification story – and the constant development of evermore futuristic skyscrapers – the emirate is still struggling to deal with lower oil revenues and a broader slowdown in the global economy. 

Recent data shows that the non-oil private sector of the economy expanded in January at the slowest pace since the same month in 2016: IHS Markit’s Dubai PMI Index fell to 50.6 from 52.3 in December 2019. Any reading above 50 indicates an expansion. 

IHS also says that companies reported in January the joint-fastest fall in job numbers in a decade, while business activity expectations slid to the joint-weakest for a year and a half. This suggests that firms expect little pickup in sales in the near future, according to David Owen, economist at the firm. 

The strain is also seen in the property sector. Damac, one of Dubai’s largest privately owned property developers, reported a $10 million net loss in 2019, a year after it realized net earnings of $313 million, amid concerns over a widespread slowdown in a sector that has seen property prices fall by around 30% from their peak five years ago. 

Several sources tell Euromoney they believe expats are leaving Dubai at the fastest pace seen since 2009. Foreign workers make up roughly 90% of the UAE’s population. 

Although analysts do not expect a return to the mass exodus seen in the wake of the 2009 financial crisis, a stronger dollar, value added tax and higher municipality taxes mean that the cost of living in Dubai is now less attractive to expats.  

Recent bank mergers and consolidation among government-related entities have resulted in job losses, while the rising cost of living is making it less attractive for white-collar expats and their families. 

“The local economy is not growing at the rate that it was,” says Simon Ballard, chief economist at First Abu Dhabi Bank (FAB). “It feels like there is a net exit, but I think it is more that fewer are coming in because of the slowdown in global macro.”

Low taxes and a glossy futuristic lifestyle were big draws for Dubai. But now the shine is even coming off the bling. One banker tells Euromoney he is now forced to buy his Breitling watches back in the UK. 

“The region has become more expensive,” he says. “It is now cheaper to buy gold and diamonds in the UK. Guys here are moving their families back to the UK.” 

The rising cost of living is also hitting blue-collar workers. The annual rent for driver Abdul’s home has risen from around Dh30,000 in 2008, to Dh50,000 now, while insurance for his car has risen from Dh1,000 a year to Dh6,400.

Corporate activity is also slow, with banks hesitant to take on more risk in the face of the lacklustre economic outlook and geopolitical risk. 

“I’m not an economist, I just look at my deals and at a deal level; it is taking a lot longer to get things done,” says a partner in the financial services department of one international law firm.

With their origins in the 1851 Great Exhibition in London, world expos have played an important role in communicating nations’ industrial innovations, acting as windows on the progress of human ingenuity. 

By the 20th century, world expos had evolved into important and elaborate vehicles for nation branding, according to a European Commission report on the Milan Expo 2015. 

The telephone, television, smartphone, IMAX movie theatres and even burgers, ketchup and ice cream cones, were all first unveiled to mass global audiences at previous world expos, Ballard tells Euromoney. 

“Humanity is at the cusp of the fourth industrial revolution,” he says. It is facing “a number of complex challenges.”

Brought together under the theme ‘Connecting minds, creating the future,’ the expo will inspire participants to collaborate towards a better and more sustainable future for all, it is claimed.

Sanjive Khosla, chief executive of Expo 2020, says: “Expo 2020 will showcase Dubai as a dynamic hub – a future-focused city with cutting-edge infrastructure, where sectors like architecture and aviation are thriving, creativity is booming and never-before-seen technology is opening up radical new possibilities for economic prosperity.”

For a state looking to cement its identity – and its economic future – as a diversified centre of global business and innovation, the expo could not have come at a better time. 

It is clear that in the construction, property and restaurant sectors, oversupply means that business is bad and the reality is that people haven’t come to terms with that yet. But Dubai’s future economy offers plenty of opportunities. 

“In the technology and startups space, business is booming,” says Harry Amos, a consultant at Kestrel Global, an advisory company specializing in future-space technologies. “Dubai has a great pipeline of international companies trying to tap into the government accelerator ecosystem and innovation funding, which aims to solve challenges of the future and make Dubai the smartest and happiest city in the world. Expo 2020 is the event to help catalyze the innovation effort.”

Expo 2020 is set on a vast 438 hectare site located south of Dubai. It will be connected to the main city by a metro line and an additional network of roads. Around 192 countries are expected to take part, each paying for the construction of a temporary pavilion. 

“It is a massively ambitious project,” says Amir Ahmad, a partner in the financial industry group at Reed Smith in Dubai. “Part of the plan is to reshape the economy of the UAE, to bring people in with different skill sets, who will have a different take on the UAE. You hope that some of those businesses will stay and take the UAE as a base. That is the plan.” 

Dubai’s government has unveiled its largest ever budget to pay for the expo, and the higher spending will likely boost investor confidence independently of the expo. 

Government spending still remains the biggest driver of growth in the region, with expenditure still tied to the price of oil. Higher government spending in turn boosts confidence and unlocks other sources of capital.

But the expo may provide the government with the opportunity to finally decouple from the constraints of global oil prices. 

“Now things are picking up again, governments are starting to spend,” says a senior banker in the region. “In many ways [growth] will be linked to the government’s confidence about the sources of their funding and liquidity.” 

The expo is expected to bring some 25 million visitors and 190 country participants, according to EY, and will stimulate Dubai’s tourism, hospitality, events and business services sectors. 

Daniel Howlett, HSBC

“Expo 2020 is a showcase of the Middle East’s potential, and we believe they are going to invest a huge amount to support the growth of the economy,” says Daniel Howlett, head of HSBC’s commercial banking business for the Middle East, north Africa and Turkey.

Estimates of the economic impact of the expo vary, but law firm Jones Day says the fair will generate approximately $23 billion (24.4% of Dubai’s current GDP) between the years 2015 and 2021. EY puts this at Dh122.6 billion between 2013 and 2031. 

Standard Chartered says the expo will boost GDP growth to 2.1% in 2020 and lift UAE non-oil growth to around 3%. 

Analysts at Capital Economics say that growth in the UAE slowed to 1.5% in 2019 but forecast it to be 2% in 2020. 

But can the expo deliver?

Bankers say the expo is the necessary platform to help Dubai accelerate its diversification plans, boost the SME sector, increase lending and attract foreign direct investment, despite the drag of lower oil prices and a broader slowdown in global economic activity. 

“If history is anything to go by, since 1988, the Middle East has grown at 4%, set against the wider GDP of 2.4%, notwithstanding the volatility in oil,” says Howlett. “We really don’t see that changing.” 

An early adopter of the need for economic diversification, the UAE is on track to reduce the share of oil as a contributor to its economy to 20% by 2021, as outlined in its Vision 2021 transformation programme. Howlett says the expo will help the UAE “reach if not better” that goal. 

In its latest Article IV review, published in November 2019, the IMF notes that sustaining robust non-oil growth after Expo 2020 remains a key priority to ensure UAE does not sink further into recession. This, it says, will come from fostering the growth of the non-oil private sector, including SMEs, and that developing transparent, rules-based fiscal frameworks will support long-term sustainability. 

Dubai will use the expo to cement the emirate’s contribution to the fourth industrial revolution: technology, innovation, artificial intelligence and the future economy are all key focuses. 

Dubai is already ranked number one in the world by foreign direct investment in future technology such as artificial intelligence and robotics.

While FDI into the Middle East and north Africa region (MENA) is slowing because of geopolitical issues and weakening regional economies, it is picking up in tech and e-commerce, says Karim El Solh, chief executive of Gulf Capital. Global strategic buyers such as Uber, Amazon and Webjet have acquired regional champions and injected large sums. 

“The e-commerce scene is also very exciting, growing at over 25% CAGR [compound annual growth rate] annually,” he says. “The new economy in the MENA region is very exciting and offers significant upside opportunities for investors.” 

But some in the sector remain sceptical. 

“In 100 years, the Middle East will have no relevance,” one US-based tech entrepreneur tells Euromoney. “Investment will dry up. Silicon Valley doesn’t care about Dubai.” 

The expo is an important platform for SMEs, which are “first and foremost” a key element in the diversification story, according to FAB’s Ballard. 

SMEs account for 95% of all companies in Dubai and generate approximately 50% of the emirate’s GDP. They are forecast to contribute 60% of UAE GDP by 2021, as the country pursues its economic diversification and transformation agenda.

To date, SMEs have won approximately Dh4.4 billion in contracts through Expo 2020, says chief executive Khosla.

“With SMEs having won 55% of all contracts so far, Expo 2020 remains committed to its promise of diverting 20% of its total capital expenditure to the sector.” 

But one of the key questions is whether or not companies that attend and exhibit at the expo will stay, and whether this will lead to meaningful job creation. 

Much of the expo's legacy will be centred on District 2020, a 5G-enabled residential community and business innovation hub that will utilize more than 80% of the structures built for it, says Khosla. 

He adds that several global corporates, including Accenture, DP World and Siemens, have already committed to set up offices in District 2020 once the expo finishes. 

The ‘expo dividend’ will be a result of the investment in constructing and hosting Expo 2020, he says, the money spent by those who visit and the businesses that will occupy District 2020. 

Sanjive Khosla, chief executive of Expo 2020

District 2020 will “exemplify a future UAE economy based on human potential,” says Khosla. It is another free economic zone – and Dubai has a good record on those.

Kestrel’s Amos says: “At Dubai’s foundation are its international free zones established over the last three decades, which have been a huge success in attracting businesses from all over the world.” 

Since 1974, 32 free zones have been set up, each with a unique set of legislation, such as the Dubai International Financial Centre (DIFC) and the Jebel Ali Free Zone. The most recent, the Dubai Design District (d3), has been open for a year and is already thriving. 

“It’s a model that works and makes Dubai an easy place to do business,” says Amos. 

Long-term job creation remains a key concern though. 

As driver Abdul warns, expats are concerned that once the expo is over, jobs will dry up and they will be forced to return home. 

“After 2020, all the normal business people will leave, all the businesses we are depending on,” he says. “When the visitors finish, we will see what will happen.”

FAB’s Ballad also argues that regardless of the best efforts of the government, the fate of the expo still rests on the state of the global economy. 

“Yes, we want tourists to come; and yes, a lot of people have been employed to build the infrastructure, but how many people will stay?” he asks. “If the global economy is fragile, then yes, many of the workers who came in to build the expo’s infrastructure may be looking for employment elsewhere. But if the global economy is feeling healthier, government expenditure will pick up.”

Khosla says the event is building a large workforce skilled in construction, operations, leadership and marketing, which will “contribute significantly to the UAE’s knowledge economy and create value for years to come.”

Eye’s April 2019 report estimated a Dh40 billion investment in expo-related infrastructure across Dubai’s economy will create approximately 50,000 jobs a year until 2031, across real estate, hospitality and business services.

Banks in the region are also suffering from the downturn in Dubai’s traditional industries. Lending to real estate makes up around 40% of local banks’ balance sheets, while stagnation in the government-related entities sector is constraining growth.

The expo will largely be financed by the government and pavilion exhibitors; that is leading local and international banks to expect an uptick in activity. But data and deal flows show that banks are reluctant to lend. 

A Dubai-based lawyer at an international law firm says that new money is hard to come by and, rather than organizing new financings, his time is taken up by restructurings and by signing waivers for cash-strapped corporates. 

“The number of waivers we are signing for corporates that are not meeting certain obligations in a loan agreement have increased, which is not a key symptom of optimism,” he says drily. 

“We are in a downward cycle,” he says. “The government is trying tremendously hard to ease the pain for corporations by reducing the various charges, but we are in a difficult spot. We will get out of it because people usually do.”

Indeed, recent data is not overly positive. The UAE central bank’s fourth-quarter 2019 Credit Sentiment Survey showed that while there is a “moderate increase” in appetite for business loans, there is a continuous tightening of credit standards. 

It found that respondents (senior credit officers from all banks and financial institutions extending credit within the UAE) do expect an increase in credit appetite for business and personal loans in the first quarter of 2020 but say these will continue to be coupled with tightening credit standards, “suggesting the reduced willingness to extend loans” among those surveyed. 

Credit demand from SMEs – a key focus for the government – also fell in the fourth quarter, although an increase was seen among local government-related entities, conventional loans and large firms, the report said. 

Expo spending is expected to boost corporate and infrastructure project lending, as well as driving growth through commercial and transaction banking services. 

Amir Riad, global head of corporate finance and investment banking at Abu Dhabi Islamic Bank, says the expo is a “major event which will stimulate further activity.

“We anticipate a broad-based uptick in lending to meet the financing requirements of growth.”

He notes that hosting the expo plays to Dubai’s strengths – trade services, tourism, real estate and infrastructure – and will help the UAE’s economy diversify more broadly. 

S&P Global agrees there will be an uptick in lending. It says it expects mid-single digit net lending expansion in 2020, supported by some of these projects. 

Although lending growth slowed slightly to 4.5% annualized in the first nine months of 2019, S&P expects a slight acceleration to between 5% and 6% in 2020. 

With SMEs a key focus for the expo and acting as the engine for future growth, banks are also looking to improve their offering. 

Many of the large international banks do not yet offer appropriate services to support smaller businesses. Minimum deposits, which are often prohibitively high for startups, are needed to open business accounts, while regional banks cater much better to smaller businesses. 

HSBC has hired staff to work on a new digital proposition as part of a broader push to improve access to funding for SMEs, says Martin Tricaud, chief executive MENA and Turkey at HSBC. “We want to go a bit deeper and develop the middle market and to selectively invest in the business banking segment, which we pulled back from after the [global financial] crisis.”

HSBC began the re-launch of its business banking proposition in the UAE in the third quarter of last year, rolling it out to Egypt and Oman in the fourth quarter. The relationship-managed offering is designed for businesses generating between $15 million and $50 million annually. 

This comes alongside HSBC’s work with the UK on its Expo 2020 pavilion, says HSBC’s Howlett. He also believes the expo will leave a strong legacy and bring meaningful interest from international companies. 

“There are currently 100,000 people from the UK based in the UAE, and 5,000 companies,” says Howlett. “We believe we can grow our UK-UAE corridor business by 50% through the activities of the expo in a three- to five-year time frame.”

He says the expo will help to “demystify” the Middle East and provide an opportunity for British companies to start trading with the region in a way they haven’t done before.

“The UK has its own desire to drive a more diverse approach to trade post-Brexit,” he adds.

Howlett says he also expects to see a general uptick in commercial banking activity – trade finance, cash management, credit and lending – as the expo supports growth.

SME lending by banks remains limited however. Most rely on government-led schemes, corporate R&D funds or external investors for support. 

“SMEs offer maximum employment and maximum GDP contribution, but have the lowest access to credit,” says Asad Ahmed, a managing director at Alvarez & Marsal in Dubai. “Banks have tried to lend to SMEs, but the outcome has been varied. In some cases, the high default rate has weakened appetite.”

Overall, Dubai’s banking sector is in fairly good shape, says FAB’s Ballard. Early consolidation has taken out a few of the smaller players, although there is still more of that to come, he says. 

While non-performing loans of around 5.6% may look high versus European figures, on a regional basis they have improved from between 7.5% and 8%. 

“The expo, coinciding with a stabilization in global growth should support and encourage continued bank lending,” says Ballard. “But expectations should be for bank lending to expand at a modest, sustainable rate, not to an exuberant level of new bank lending, given the still underlying fragility of the global economy.”

Another important area for growth is in infrastructure spending. 

Much hope for the expo is related to its legacy in both innovation and infrastructure. EY estimates that some Dh40.1 billion would be invested in infrastructure and other assets with “most likely to be retained for future use.”

Infrastructure spending will be a driver of growth in the region, according to HSBC. The region’s $2 trillion infrastructure spending plans dwarfs China’s planned $850 billion for its Belt and Road Initiative. 

“There is something quite transformative here in the Middle East as these economies grow and diversify, and the expo serves as a platform for that,” says Howlett. 

Dubai intends the expo site to be transitioned to District 2020, with over 80% of it to be retained, according to EY. Successful management of the legacy period should bring in gross value added of Dh62.2 billion. 

In addition, the expansion of the Dubai metro and road links to the expo site, will improve accessibility to the airport as well as to the rest of the city. 

Elyas Algaseer, co-head of the DIFC branch and head of corporate banking MENA at MUFG, says he expects the increase in infrastructure spending to support credit growth via a rise in borrowing activity in the construction sector.

While he believes the expo will promote economic growth, support greater productivity and enhance investor confidence, Algaseer warns the region’s infrastructure spending is not immune to global growth headwinds and that governments will continue to be selective. 

“In a more challenging environment, attention will turn to the quality and efficiency of project spending, with regional authorities likely to target capex spending that will generate only the most optimal value,” he says.

Infrastructure spend in the Gulf Cooperation Council area is estimated to total $1.6 trillion between 2019 and 2023, an increase of roughly 2.7 times from 2014 to 2018 levels, based on data compiled by the Middle East Economic Digest.

While Expo 2020 organizers say the site will be ready to open on October 20, the development of expo-related projects has not been without its challenges. Expansion work on the Al Maktoum International Airport was suspended last year. It has yet to resume. 

The airport opened for cargo in June 2010 and passengers in October 2013. Slated as the world’s largest global gateway with capacity for more than 160 million passengers per year, it is also expected to serve as a logistics hub for 12 million tonnes of freight, according to Dubai Airports. 

A Dubai Airports spokesperson says the group is currently “reviewing its long-term master plan to ensure infrastructure development takes full advantage of emerging technologies… and optimizes investment to grow its already significant contributions to Dubai’s economy. The exact time lines and details of next steps are not as yet finalized.” 

There is no doubt that Expo 2020 could act as a real catalyst for change for Dubai – it will result in important innovations in technology that will help the city adapt and grow. But the region cannot yet shake-off its reliance on oil receipts, nor on its need for foreign direct investment, which remains closely linked to investor perceptions of geopolitical risk. 

In addition, Dubai and the broader UAE’s position as a gateway on the East-West global corridor means it remains as exposed as anywhere to the fate of the global economy. 

Expo 2020 won’t solve the issues of high indebtedness or correct the property sector, but it might just prove that Dubai has more to offer than energy companies and skyscrapers. 

The government needs to work hard to convince the global economy, as well as residents like Abdul. 

The Milan Expo in 2015 aimed to examine and find shared solutions for global food and sustainability challenges. It attracted 21.5 million visitors, although 75% of these came from Italy, according to an evaluation report published by the European Commission. The report concluded that it had been more difficult than expected to reach people from other member states and elsewhere. 

The expo was also not without controversy. Violent protests marred the start of the opening ceremony. Campaigners, who saw it as a symbol of waste and corruption, clashed with police. The event was also hit by a corruption investigation, which saw several officials arrested, as well as by cost overruns and construction holdups.

The expo got off to a slow start, which the EC attributes to negative publicity due to construction delays and corruption scandals

The site itself is still under development by owner AR Expo, which is working to transform it into a science and technology centre. 

It is hard to find much retrospective data that gives a good indication of the success or failure of the project, but in 2015 alone it added value of the event amounted to €4.1 billion, equivalent to 0.25% of Italy’s total GDP for the year, according to the EC report. 

The SDA Bocconi School of Management said the event would bring an added value of €13.9 billion between 2012 and 2020. It added that linked activities between 2012 and 2020 would drive an increase in production in Italy by €31.6 billion, equal to 1% of national production.