How Robust Is Dubais Economic Recovery Plan for the Banking and Real Estate Industry - Dissertation Example

?Research proposal How robust is Dubai’s economic recovery plan for the banking and real e industry in countering the dramatic losses the United Arab Emirates has experienced as a result of the 2008 financial crisis? Table of Contents Introduction 3 Abstract and Keywords 4 Research Background 5 Research Aims and Objectives 6 Research justification and questions 7 Literature Review 8 Research Design 8 Practical and Ethical Issues 9 A Timetable 10 References 11 Bibliography 11 Introduction UAE is one of the sturdiest of all GCC nations with a high volume of oil revenue. The nation’s current account balance is quite high which is the sole reason why perhaps the subprime crisis could not leave a blotch upon it despite the close terms that it maintains with USA. However, the nation also invests in infrastructure simultaneously. In fact, the trends in real estate investment have been growing substantially over the years for UAE. Most of the capital poured into the economy for the purpose is contributed by oil revenues while the rest comes from investments made by foreign institutional investors. In fact, the commercial banks of the nation had been indulging itself into the accumulation of foreign capital in order to sustain the rising demand for infrastructural development within the nation. But UAE, unlike most other nations which attempt a fast economic expansion, are rarely found to be investing in mortgage backed securities being issued by US commercial banks. These securities are associated with very high returns but are highly risky as well. The hefty returns turn them into attractive options for many financial institutions that are ultimately supported by their respective domestic governing bodies. However, the government of UAE does not support any such activities which could pave the channel for speculative activities and hence, expose the economy to the risk of exogenous shocks. UAE nevertheless is highly vulnerable to speculative activities owing to the huge investment that it makes in oil resources. But despite its susceptibility to the same, the economy is found to be tackling the aspect of its vulnerability quite aptly. This primarily is because of the effectiveness of the economic recovery plan being framed by the national government to rescue the nation from any exogenous shock. UAE receives a high amount of foreign investment from institutional investors. After the subprime crisis of 2008, these investors however withdrew their capital from these economies owing to the risk they believed to be hovering around their resources. Given the huge proportion of the total required funds that these foreign capitals consisted of, the withdrawal had been nothing less than a shock for the domestic governing authorities. Yet they bailed themselves out of the situation and eventually emerged out as a sturdy and robust economy. Abstract and Keywords The present paper deals with the issue of economic recovery plan constructed by the national government of UAE in order to tackle the aftermath impact of subprime crisis of 2008 which originated in the US housing market. Given the liberalised state of the nation at that point of time, the obvious consequence would have been that the crisis could have floated across from USA to UAE. However, the national government framed polices so effective that such a scenario could be efficiently prevented and eventually the nation emerged out as one of sturdiest of all GCC nations. Despite the amount of vulnerability that the nation is exposed to owing to the highly fluctuating oil price, the national government is found to be tackling its economic issues quite efficiently. In order to ensure the effectiveness of the economic recovery methods implemented by the national government, the present paper attempts a research survey. The methods followed are those of primary research and have been conducted with the help of questionnaire method. Importance of the paper lies in the fact that a public assessment of the methods being implemented by the national government could actually take the form of a guideline for the domestic administration in future and could also be treated as a lesson for developing economies prone to an exposure to such risks. Given UAE’s highly fluctuating current account balance, owing to disruptions in the oil price, the lesson to be learnt will be worthwhile for economies which experience such trends in their national income levels. Keywords: Subprime crisis in UAE, real estate and banking sector of UAE, economic recovery plan of UAE Research Background United Arab Emirates is one of the most significant and influential of all GCC nations. Despite being the most robust out of the lot, the economy could not surpass the financial crisis of 2008 and eventually it took a form worse than what the situation had been during 1930s. The fundamental issue had been a sharp drop in the global demand for oil which negatively affected the fuel price. Given the importance of oil as the sole pillaring factor behind its economic development, Saudi Arabia’s average annual economic growth figures plummeted down from 7.4 percent in 2008 to merely 0.5 percent in 2009, as a result of an oil price decline. The terrific downfall in economic growth rate was reflected through a fall in per capita income within the economy. With domestic demand dipping simultaneously, the downfall was mirrored upon the real estate sector of the nation which reportedly accounts for approximately 16 percent of the national income (United Nations, 2009, p. 73). The real estate sector being one of the most important sectors in UAE, activities of the domestic banking sector almost spins around the former. In fact, it was due to an accelerated infrastructural development in the nation that the banking authorities were indulged in accumulation of foreign loans between 2005 and 2008; precisely, the volume of appreciation could be approximated to US$ 60 billion during the phase (United Nations, 2009, p. 77). However, the region escaped untouched by the crisis that originated in the West, primarily due to their limited outlay in mortgage backed securities issued by US commercial banks. The banking sector of UAE largely maintained their liquidity and profitability positions. Bank assets and profitability climbed up sharply post 2007 as did their capital adequacy ratio (CAR). In fact, CAR of the UAE banking sector rose to 13.3 percent during the middle of 2008 which certainly indicated their robust financial position. The banks did not experience a sharp fall in deposits owing to an increase in the rate of interest upon deposits. But, the need to simultaneously hike the rate of interest upon loans resulted to a shooting up of the risk of loan defaults. The situation especially became tense with the increasing demand for private sector loans and a concurrent capital flight of foreign deposits during the latter part of the year (IMF, 2009, p. 40). This had been the very issue which perturbed the banking authorities of UAE and hence, compelled them to undertake measures to prevent the possibilities of a looming crisis. Research Aims and Objectives The prime purpose of the present paper is to evaluate the economic robustness of UAE. Despite the economy’s heavy dependence upon the real estate segment of the nation, it had managed to stay afloat even amidst recessionary pressures around the globe. The time when the crisis was invoked is also characterised by an almost completely liberalised world which leaves ample room for external shocks to travel within the premises of an economy. UAE experienced massive capital flight as well like many other nations which were subdued by the subprime crisis. But, the nation escaped any serious brunt of the shock which left the Western nations devastated. The fact that UAE’s oil revenues had been nominal at that time too raises eyebrows given the economy’s heavy dependence upon the same. Amidst the economic vulnerability that the nation had been exposed to at that point of time, its majestic revival had been praiseworthy. While the apparently stronger economies of USA and Europe submitted to the depression, UAE emerged out with flying colours, which diverts the focus towards the effectiveness of domestic measures adopted for recoupment. An obvious implication of the nation’s successful stride is the national government’s wise policy decisions and the factors which they emphasised upon while framing the same. Hence, the strategic question which guides the purpose of the paper is the evaluation of the effectiveness of government policies adopted in UAE to counter the effect of subprime crisis. In addition, the factors which guided the central administration to adopt those very policies would be examined as well. The fundamental purpose of such an assessment will be for setting the standards for outlining the administrative decisions to bail out an economy during periods of exigencies. The lesson to be learnt will especially be relevant for the developing nations which are not characterised by sturdy financial regimes. Research justification and questions UAE generates the highest amount of oil revenues among all economies in the GCC region which could be raised as a factor behind the nation’s steady position even amidst a global crisis. However the nation also maintains a high volume of current account balance which might be regarded as an obvious fact behind the nation’s steady stance. But given the poor or rather negative growth in oil revenue earned by UAE, this rationale might seem slightly unconvincing. This is especially so since the domestic administration had been pinning up highly upon the infrastructural development of the economy which actually demands hefty investments. Even though the nation maintains a high volume of current account balance, it is spent out in the payment of expenses incurred in constructing modern infrastructure so that the proportions of inflows as well as outflows are almost equivalent. This is evident from the volume and quality of buildings that the nation is venturing into at present. Despite the degree to which the nation has been investing in different segments and the way in which it has been exhibiting its concerns about economic expansion, it managed to survive the Tsunamic tides of the subprime crisis. The primary factor which operated behind the nation’s ability to surpass the impact of the crisis had been the domestic strategies adopted by the national government. The wisdom that the national government displayed while tackling the issue is commendable and is worth a lesson for other nations. Justification of the research lies in this very fact. Accordingly, the research question to be constructed in this regard will be to assess the effectiveness of the national government’s strategies in planning the economic recovery plan of UAE. The nation which depends severely upon its real estate sector survived the brunt of the crisis which actually originated in the US housing market. The fact that the crisis did not swim across the same cross-sectional sector is quite surprising and demands a certain degree of examination in an era of globalised world. Hence, the actual question to be set in this case will be an evaluation of the recovery process being framed by the national government of UAE in order to bail it out of the external subprime crisis. In order to make the assessment effectively, a primary research will be conducted in the present case. The research approach will be realist in nature and hence, the opinions of actual respondents will be taken to serve the purpose of the paper. Such a stance will actually help to evaluate the effectiveness of the national government’s strategies more aptly and help in an evaluation of its reception among the public. Literature Review Subprime crisis had its impact upon the entire world in one way or the other. The impact had been especially great among nations which had been liberalised already. However, the impact varied nation wise depending upon the extent of liberalisation. For instance, the effect if the crisis had been minimal upon the economy of UAE which although depends largely upon the domestic real estate sector, escaped the crisis due to an effective recovery plan framed by the national government. The banking sector of the region surpassed the crisis efficiently as well owing to its already sturdy nature and least dependence upon the mortgage backed securities issued by US commercial banks (Oxford Business Group, 2008, p. 47; World Bank, 2009, p. 127). However, the real estate sector of the nation experienced a certain amount of collapse initially owing to the huge investments that the foreign investors made in the sector and post crisis they withdrew a chunk out of the total resources being invested. A list of suitable literature to be employed in the present paper has been provided in the reference portion. Research Design Primarily, a primary research approach will be adopted in the present case rather than a secondary one. The main reason why a secondary approach is not being adopted is that the economy of UAE being an Islamic one, rarely publishes its intricate details which could actually help in an effective assessment, in secondary sources. Hence, the fundamental approach in this case will be that pf a primary research where a sample survey will be conducted through employing Simple Random Sampling without Replacement (SRSWOR) methods. Such methods will be employed in order to prevent bias in the sample results. The questions so framed will constitute of open as well as close ended ones. While the former one will be evaluated with the help of Likert Scale tests, the latter one will be assessed qualitatively. In case of open ended questions, a quantitative evaluation will be made with the help of pie charts while the qualitative ones will be evaluated through inferring the opinion of the majority. However, there are certain issues or limitations which had to be met by the surveyor. They could be briefed as follows – Firstly, in case of primary research, the respondents are rarely found to be coordinating completely with the surveyors. Most of the potential respondents ignore the surveyor completely, while the others who respond seldom feel it essential to complete the entire interview. Secondly, it is necessary for the surveyor to be trained appropriately since a questionnaire method often demands a proper assessment of the open ended questions which requires a certain amount of skill of the surveyor. Unless a proper training is imparted, there could arise concerns about the unbiased nature of the sample survey. Practical and Ethical Issues Considerable effort had been invested in ensuring that there are no ethical concerns associated with the present research on part if the surveyor. However there are certain problems related in this case especially with regard to the sample survey where the respondents often do not feel necessary to respond suitably and in a fashion advantageous for the surveyor. This very issue raises problems in conducting the primary research. Furthermore, in order to protect the interests of the respondents, their opinions are kept secret and confidential. The only costs which are involved in the present case are those associated with training the surveyor in order to analyse the open ended questions as well as to frame the component questions in the questionnaire. A Timetable The concerned time table could be depicted as follows – Task Start date Duration (Days) End date Framing questionnaire Mar-11 90 Apr-11 Conducting survey (Day 1) Apr-11 30 May-11 Day 2 Apr-11 90 Jul-11 Day 3 May-11 120 Sep-11 Evaluation of the survey Jul-11 120 Nov-11 It could be expressed in the following Gantt chart – References International Monetary Fund. 2009. United Arab Emirates: 2008 Article IV Consultation - Staff Report; Staff Statement and Public Information Notice on the Executive Board Discussion. Washington, D.C., USA: IMF Publications. Oxford Business Group. 2008. The Report: Dubai 2008. UK: OUP. United Nations. 2009. The global economic and financial crisis: Regional impacts, responses and solutions. USA: United Nations. World Bank Publications. 2009. Global Development Finance: Charting a Global Recovery, I: Review, Analysis, and Outlook. USA: World Bank Publications. Bibliography Ahmad, Z. (No Date) ‘Islamic banking: State of the Art’ [Pdf]. Available at (Accessed: July 12, 2010). Ashton, T. S. (2006) An Economic History of England: The Eighteenth Century. London, UK: Routledge. Bank of England (No Date). ‘Key moments in the Bank;s history – A brief guide’ [Online]. Available at http://www.bankofengland.co.uk/about/history/index.htm#3 (Accessed: July 12, 2010). Iqbal, M. & Molyneux, P. (1975) ‘Thirty Years of Islamic Banking: History, Performance and Prospects’. JKAU: Islamic Economics Research Centre, Vol. 19 (1): 37-39. International Monetary Fund (November, 2008) Regional Economic Outlook: Asia and Pacific. IMF Publications. Kuran, T. (1995) ‘Islamic Economics and the Islamic Subeconomy’. Journal of Economic Perspectives, Vol. 9 (4): 155-173. OECD (2008) OECD Economic Outlook, Volume 2008, Issue 2. OECD Publishing. OECD (2009) OECD Economic Surveys: New Zealand 2009, Vol. 4. OECD Publishing. Pond, K. (2007) Retail Banking. London, UK: Global Professional Publishing. Schoon, N. (2009) Islamic Banking and Finance. London, UK: Spiramus Press. Seshaiah, S. V. & Narender, V. (2007) ‘Factors Affecting Customers’ Choice of Retail Banking’. The IUP Journal of Bank Management, Vol. VI (2007): 34-46. United Nations (2009) Economic and social survey of Asia and the Pacific; 2009: addressing triple threats to development. United Nations Publications. Read More