Wednesday, September 1, 2010

Congratulations gentlemen on surpassing Bahrain. Beneath your chairs are some boxing gloves in case any pregnant women try to sit down at your table.

So I’m back from the break now and ready to go for September. A lot has happened in the interim so I have a lot of writing to do. But before I get into the bigger issues I want to write about some of the smaller, less noticed ones.

Speaking of small, Bahrain was downgraded by Moody’s last week. I found this out by reading an article in The National that was positively dripping in schadenfreude. My favourite part of the article was where they called the downgrade the first fora GCC government. Well, I suppose that’s true if you don’t count the total obliteration of the various Dubai government related entities and the restructuring of Dubai World. Personally I think those things do count but I’ll not quibble with the national. The GCC has now seen its first sovereign downgrade of the financial crisis.

Though this is not big news in the way that the downgrades on the Eurozone periphery have been, it was only one notch and is still investment grade, the report is still interesting. They point out that Bahrain has a 7% of GDP budget deficit and has relatively little in the way of foreign exchange reserves or sovereign wealth funds in contrast to Saudi Arabia or Abu Dhabi. This means that should the world economy slo significantly and drive down oil prices Bahrain will be in a bind without much room to manoeuvre. Interestingly they also make the point that political tensions between the Shia and Sunni on the island are a source of potential instability. Most interesting are the points they make about the financial sector.

Bahrain has long been a financial center for the Gulf and Moody’s seems to argue that the banking sector in Bahrain is a liability both because it is too large and because it is too small. It is too large because with bank balance sheets three times the size of GDP any serious deterioration of asset quality might require government intervention which would be beyond the capacity of the government to intervene given its already stretched fiscal position. At the same time Moody’s says that the banking sector is not large enough to diversify the economy away from its dependence on hydrocarbons. So the Bahrainis seem to have sought to diversify their sources of revenue but instead have simply added another liability, at least according to Moody’s.

Well I can tell you why the banking sector in Bahrain is not big enough, it’s because Dubai has totally stolen its mantle as the financial center of the GCC. Sure there are still a lot of bank assets in Bahrain but virtually all the growth in financial employment in the GCC has taken place in Dubai over the past five years. Some have even consolidated their operations in Dubai and closed their Bahraini operations, or rather left a skeleton crew in Bahrain to appease the government but functionally consolidated in Dubai.

Why is this? I’d say it’s for two reasons. One is that when Bisher and Dr. O were not too busy lighting Sheikh Mohammed’s money on fire with various investment schemes or paying themselves substantial bonuses for managing those fires, they were luring the wide world of finance to the DIFC. The DIFC legal system has turned out to be kind of a bait and switch but when choosing a location once you have taken the bait, it’s hard to switch. The other reason is that it is a lot easier to attract expat knowledge workers to Dubai than it is to attract them to Bahrain.

There are many reasons for this. Some people will point to the infrastructure, which is impressive. Personally I think Dubai is likely to be the red headed stepchild of the capital markets for some time to come so I doubt that they will be adding to this but the silver lining to the collapse of the real estate market is that there is still a lot of spare housing capacity in Dubai so they actually don’t need to add to it. Others might point to the relatively permissive moral environment of Dubai. This is a factor as well, bankers and traders like a martini now and again. Their girlfriends like to be able to weak little bathing suits on the beach and occasionally kiss their significant others in gratitude for rescuing them from the rain of London. To be sure the atmosphere is a bit chillier now than it was a few years back but it’s still not Saudi Arabia.

While the liberality and infrastructure of Dubai are impressive I don’t think they are the primary reason why it is easier to move people to Dubai than elsewhere in the Gulf. I think the reason for that is the human infrastructure. Over the past ten years Dubai has achieved a critical mass of expat human capital. People want to live there because everyone else does. It has become the regional headquarters for so many multinationals that the expat social milieu is not dominated by a particular industry. Finance is prominent to be sure but there are foreigners there in the media, pharmaceuticals, infrastructure, consulting, you name it. It’s a much more interesting place to live than any other city. Dubai has created this environment through massively leveraging itself to build the physical infrastructure and marketing the hell out of itself in the West. Those two things are not sustainable now that the good ship Dubai has struck the restructuring iceberg but the human architecture that it has build should be able to outlast either one of those two things.

If Dubai is ever to recover it ABSOLUTELY must retain its preeminent position as the place for international expats to live and work. Thus I was shocked to read a recent news article about an assault on expats in Dubai by three Emirati men. At the IKEA cafeteria a Canadian investor man and his marketing manager wife sat down at a table for twelve which was partially occupied by Emiratis. The Emiratis claimed the entire table and demanded the couple depart. The woman, who was seven months pregnant and has doubtless been walking endlessly around the IKEA which is designed to be walked around endlessly demurred the Emirati brothers proceeded to beat her and her husband senseless. A Syrian man came to the rescue when the Emiratis began beating the unconscious husband with a chair and they beat him senseless as well. They broke the jaw of the pregnant woman and there is some ambiguity as to whether or not her pregnancy was compromised. The last thing her husband saw before being knocked unconscious was one of the Emiratis beating his wife and blood rushing down her legs. My guess is that if her pregnancy had not been compromised the courts would have made a point of noting it as a mitigating factor.

Obviously an attack on a pregnant woman by three Emirati men in the middle of an IKEA cafeteria is horrific in its’ own right and pretty hard to understand. What’s more, Dubai is completely dependent on foreigners to do most of the work, to move there, buy apartments and set up businesses in order to dig Dubai out of its deep dark hole. You would think that the authorities would deal harshly with the culprits. Besmirching the reputation of Dubai as a tolerant multicultural hub poses an existential threat to Dubai itself. Alas, it is not so. The assault occurred in June of 2009, the first hearing was in August 2010. All three assailants are free men in a city where hundreds are in prison for bounced checks. Two of them failed to even show up for the hearing, the judge questioned this but was not given an explanation and no action was taken. It would seem that the Emiratis don't think this is a big deal or that they will suffer any consequences. They may well be right.

It’s their country, they can do what they want, but if you ask me this is no way to run a country completely dependent on its reputation among foreigners. As sad as the article itself is the comment at the bottom from an Emirati: “they should have moved.” They probably will, and not to the next table but rather to the next country and if enough foreigners decide to follow them the creditors will beat the hell out of Dubai.


Anonymous said...

Well said! I wish there was some equality in law here, but i can't see that happening any time soon. I doubt you can book a table at Ikea anyway.

Anonymous said...

wow i hadnt heard about this...frigging animals...speechless and grateful that I have left the UAE now...waiting for karma to kick in on the country now...

Anonymous said...

There will NEVER EVER be equality of the law....sadly thats the reality...the habibi mentality is:if you dont like it here, go back to your country...and as always, few will leave and more will come in...the circus goes on...and on

Laocowboy2 said...

Imagine the yards of newsprint and pious indignation in the UAE if the reverse happened in Canada? Dubai has always been hypocrisy central.

Whe it all went sour I must confess to a "Yes!" moment. And they are still in denial.

I hope that the story gets maximum exposure internationally - perhaps reprinted in racing programs globally?

Q80 pt-I said...

Hi Ken et al,

Been awhile since I've posted here. Hope y'all are keeping and doing well despite all that's going around.

Now, regarding the poor pregnant woman, her husband and the Syrian samaritan: this is not new but a common feature in my part (GCC) of the world. Was it not recently that a Swiss or French kid that was raped in Dubai and his mother cornered into paying a huge fine if she did not bow out peacefully and take down the boycott Dubai blog? Was it not recently that an Emarati teez ran over an expat couple in Gharhoud after they got out of a taxi to go to Irish Village or somewhere thereabouts? Was it not recently that a two year-old (at 02:00 AM, mind you) and her mother sent a couple to jail for kissing at a restaurant based on the testimony of the two year old. And in not so distant past a 12 year old Asian girl visiting her father for summer holidays was abducted from the airport in KWI and raped and dumped in the desert. A nurse who attended to the barely alive child said, that it was better if the child had died and not have to have stitches from the front to the back (you know what I mean). So folks these atrocities are very common here and in many parts of the world. Substitute Dubai with any other GCC territory. Same shit! Only difference is: here there is no recourse whatsoever. Some ruling dude decides. Judges are pawns, serfs, wenches. Everybody is dispensible here, even locals. These are absolute dictators marketing themselves off as benevolent leaders/rulers, fathers of nations, etc.

Q80 pt-II said...

part -II

Many of us Khaleejis, are quite arrogant, rude, inconsiderate and hate the expats in general. We should not be called Arabs, for we really are khaleejis with a very mixed ancestory. Many of our ancestors were pirates and smugglers, but today we try to pass off pearl divers and spice traders. Despite all that, many of us are very hospitable and kind folks, mind you. In any case, without going off on a tangent, let me say this. It is time for the expats of my region to make a stand. A peaceful stand. Most of the local businesses i.e. malls, hotels and slutels, telecoms, etc. survive solely from expats. In this particular case, start by boycotting IKEA and its sponsor Al-Futtaim. I know it is not going to be easy, but it can be done. You can do it. Heck most of the Brit expats should know how powerful a peaceful boycott can be. Did not Gandhi kick your asses out of India by peaceful boycott? Learn from history, do not get suckered. Make a change, make a difference. The Americans use sanctions, embargos, etc. You can do it on Al-Futtaim, on the Abdullahs, etc.

Q80 Pt-III said...


So let the locals (of whichever region) tell you: if you do not like it leave. Of course, leave if you have to, otherwise ignore the arrogant idiot. Let him know that you call the shots. You cannot strike because the law does not allow it, but hello you can pick and choose where you buy from, with whom you bed, with whom you do business with.

Q80 pt-IV said...

Part -IV

Finally, folks, a word of advice, both to those who are here and who are planning to move here. Get yourself a copy of Escape from Dubai by Hervé Jaubert, and read it thoroughly. Change the title to, "Dubai for Dummys", "Dubai a wake-up call", "Dubai made easy", "Dubai in a week" whatever pleases you or meets your aptitude and READ it. Yes, substitute the title "Dubai" with "Kuwait, Qatar, Bahrain, Saudi (Sowdee), Abu Dhabi, etc." The context is same all over my region. (Mr. Hervé, if you happen to read this post and if your sales skyrocket as of this posting, I demand a signed copy of your book). Yes, I have read it and it is a mild version of what goes on here. He missed out tons of stuff, I know.

I have no choice here. I'm a denizen of this place, but you can make a difference!

Until later.

IWasAFool said...

Ken, you are my no1 analyst on happenings in the UAE; I bow. I spent a few years in Dubai, and had my own run-in with UAE law. I have pledged to never return. Forget all the financial analysis - it is the very basics, namley a predictable and fair legal system that needs to be in place for foreigners to feel comfortable enough to move. Issa, Ikea....need I say more? I think Dubai is in a death spiral, and it more than deserves it.

Anup said...

wtf, go get your facts right. I think the Bahrain/ Dubai comparison is based purely on perception and not facts.

1) Bahrain has 138 Banks (32 Retail Banks and 78 Wholesale Banks and rest being rep offices), 45 Investment Companies registered there, Typically Holding companies, Family offices. Insurance Companies make another 169 (Out of which 39 locally incorporated) out of this whole list. Apart from this list of 406, you have another whooping 2736 Mutual Funds registered there (139 Local & 2597 Foreign Funds domiciled). You still think 'Dubai' is bigger?

2) Regulations are much better than DIFC or CB UAE

as regards the emirati beating up case. that's like saying wayne rooney went to a hooker (with his pregnant wife waiting at home) and generalizing that all brits screw around leaving pregnant wives home!!!

seems like you smoked the wrong pipe while on vacation!!!

Undercover Dragon said...

Thanks for drawing attention to this story. Hope you don't mind me linking to it and quoting you.

Undercover Dragon

Muscat Confidential

Tomo said...

This is the most stupid thing I've heard for a while! what kind of men would do that, they must be animals. Dubai court should make an example of thier punishment,

Ken said...


I don't disagree that there are a lot of banks and financial companies in Bahrain or that there are a lot of mutual funds registered there. The point I am making is that most of the growth in recent years, particularly in terms of employment, has been in Dubai. According to AMEinfo there are a total of 14,000 financial sector jobs in Bahrain. StanC and HSBC betweeen them employ that many people in Dubai. There are that many people working just in the local commercial banks in Dubai.

Dubai is also the regional headquarters for most of the international firms serving the region many of whom have moved thier headquarters to Dubai in recent years.

To your point regarding superior regulation in Bahrain I think I may well have to concede that point entirely though I think I do that in the main article where I describe the DIFC legal system as a bait and switch. I've written pretty extensively on this subject.

Also I do not generalize the Emirati beating as behavior general to all Emiratis. Quite the opposite, the thing that concerns me is not that this sort of thing happens frequently but rather that it carries no cost as long as the victims are not Emirati. This is the wrong message to send.

Ken said...

@ general commenters. I seem to have touched a nerve with this one, let's keep it clean shall we. The actions of these guys cannot be generalized to all Emiratis and I will not publish comments to that effect.

Anonymous said...

Why do you say it appears as if the beatings are being treated as a civil case? The National clearly states the Criminal courts are trying it. It reconvenes on Oct 14 to continue. There is no outcome yet. Let's see what happens......

Ken said...

@Anonymous: quite right. There was a Gulf News article which referred to it as a civil case that I read after I read the article in the National and that stuck in my head for some reason. I have retracted that section, thanks for the catch.

Ken said...

@ Undercover Dragon, thanks for reposting, it's driven quite a lot of traffic my way. That's one successful blog you have over there.


OMG said...

This is truly horrible. I agree with whoever said it earlier - I wish I had not heard. A true WTF???

Anup Namboodiri said...

@Ken - point noted and agree on the financial industry employment part (Bahrain Vs DXB) I take back some parts of the earlier comment


Anonymous said...

Sorry, the link to the actual article about the assault now only goes to the National front page- would you have a direct link?
I've found two other related pieces via their site search, but neither of those are the one you cite. I'm hoping to reference it (and you) in a write-up I'm doing about the relationship(s) between business-economics-culture. And: your blog is fantastic. I really enjoy reading your excellent posts.