The Atlantis site of the Jumeira Palm Island in Dubai.Anonymous
KARL MOORE: This is Karl Moore of the Desautels Faculty of Management at McGill University, talking management for The Globe and Mail. Today, I am speaking to Dr. Henry Azzam, who is the CEO for Deutsche Bank in the Middle East and North Africa. We are here in Dubai at the Dubai [International]Financial Centre. Good afternoon.
HENRY AZZAM: Good afternoon.
KM: The world has been absolutely agog with Dubai over the last few months. When is Dubai going to turn around? Is it going to come around in the next few years?
HA: Dubai is like those other countries where you have a sovereign debt issue; they have a sizable debt outstanding that they need to work out. They have started the process of restructuring their debt, estimated at around $22-billion [U.S.] in the next few years. The process has started. I would imagine that they should come to an agreement with their banks in the coming few weeks. Once that is settled, then it becomes easier for Dubai to tap the market again, especially if they do get a government guarantee for the new loans and/or if Abu Dhabi gives them more support.
We are talking about a city in a country where the sovereign wealth fund of that country owns around $400-[billion]to $600-billion. It is not a country which is bankrupt. Now, overextended, overleveraged when credit was available and cheap, mismanagement - yes, all these factors were reasons why we are here. But at least there is a lender of last resort. If that lender of last resort, Abu Dhabi, decides to help, the money is there. Maybe we do not need to bail each and every project that was done during the boom year because we do not want to repeat excessive expenditures and excessive lending. There is a lesson to be learned in the process, but I am optimistic.
Dubai did, within a very short period of time, what it would have taken more than 10 years for others to do. To build a town or a city like Dubai now, from scratch, would cost you much, much more. Was there wisdom in overborrowing and building it up in a short period of time so that, today, nobody could even dare to say 'I can compete with Dubai as a regional hub?'
For services, Dubai is today, the hub for regional services, in the region, because it has infrastructure; it built an infrastructure conducive enough to attract talent from all over the world. It attracted institutions, financial institutions from all over the world. It is very difficult for others to replicate Dubai. Yes, a price was paid; they did it over a short period of time. The only way they could have done it like that was by overborrowing. Now, they need to restructure that overborrowing.
KM: We hear stories about cars abandoned in the thousands at the airport, of prices going down by 50 or 60 per cent. It is an economy that is struggling through it, but you do not think that it is going to take five years to get back to some growth?
HA: Yes, we have seen prices dropping by 50 to 60 per cent from the peak. But before we reached the peak, prices went up by more than 200 per cent. We are adjusting, which is something that is welcome. I would say that the town has a problem with the real estate sector, with excessive supply. But other sectors are still flourishing. We have a flourishing tourism sector; we have flourishing transit airline, telecommunications [sector] port, airport and so on. So it is a regional hub. As the whole region starts picking up momentum, Dubai will feel it and will also start improving.
With time, the excess supply will be worked out. It is a matter of time. Where you have more people coming in, more people buying, the demand for rent, the demand for housing and offices will pick up. With time, you will have people upgrading. Those people who are living nearby will come to Dubai. There are dynamics that would help Dubai get out of the crisis. We know, we are living here; we have been living here for quite a while. There is no alternative to Dubai. This is the place of choice for talent, where they want to live and work. Eventually, the excess supply will be cleared. Will it take one year or two years? Maybe, but it is a process that has to take its due course.
KM: Talking to some McGill students now, one of the interesting points that you make is that people outside of this part of the world lump the Middle East as a risky area. That lacks subtlety. What is the problem with lumping the whole Middle East together as a highly risky area?
HA: Of course, if you are looking at the map, if you are standing in Washington or Canada and looking at the Middle East map, it is a small geographical area and you can say, 'This is minor; this is risky.' The Gulf countries have been stable for such a long time. The neighbourhood around them is less stable, be it Iran, be it Iraq, Israel, Palestine, or recently, Yemen. But [the Gulf countries]have been a bastion of stability over the last few years.
This is why I would always advise people analyzing or looking at the region to differentiate between the stable and the unstable regions. Here you can do business profitably with very little political risk.
Now, if there is a flair up in Iran or Iraq, we will be affected by people who are looking at the region indiscriminately, not necessarily the people living in the region. So I would like people who are looking at the region to be more discriminating in their analysis.
KM: This has been Karl Moore of the Desautels Faculty of Management at McGill University, talking management for the Globe and Mail, today with Dr. Henry Azzam, who is the CEO of Deutsche Bank for the Middle East and North Africa. Today we have been here with 24 McGill students in Dubai.
AFTERTHOUGHT: This week, I am continuing an experiment where I have asked two McGill MBAs and this week a [Bachelor of Commerce student]to join me in reflecting on what was said during the course of the interview. I would like to thank MBAs Eric Daye and Colin McBride and BCom Brenna Comacchio for their input as I prepared the following comments.
In late February, a group of 24 McGill MBA and Bachelor of Commerce students travelled to the United Arab Emirates for 10 days to observe firsthand Dubai and Abu Dhabi's economy and to try to understand its future. While there, we met with senior executives from a broad variety of organizations, including Canadian firms SNC Lavalin and CAE, as well as Deutsche Bank, GE, McKinsey, Booz & Co., Mubadala Development Co., Better Homes, Etihad Airways, the Sheik Khalifa Medical Centre, MNC hospitals, and journalists from The National newspaper, an English-language daily in Abu Dhabi. What they told us was instructive. This interview with Dr. Azzam was done as part of one of the meetings we had while in Dubai.
I had never really thought about Dubai as an unrivalled regional hub until Dr. Azzam made the point. By the end of the trip, we came to see Dubai and to some degree, Abu Dhabi, as regional hubs in at least four ways. As an airport hub, its strategic geographic location has also helped Dubai develop a booming regional and, in some ways, a global airport hub, with weekly flights to all six continents. Abu Dhabi, through Etihad Airways is following a similar path.
To this, add the ports; the Jebel Ali port and Port Rashid are the largest man-made ports in the world, servicing a high volume of international trade. Strategically located, they serve the entire UAE and dominate the ports of the Middle East. Dubai, smack dab between Asia and Europe, has been an important port for centuries.
A third way it is a regional hub is as a financial centre for the Middle East and North Africa, with access to various financial firms from around the world. Finally, Dubai's low crime rate, clean streets and excellent schools also help make it an alluring place to locate headquarters for multinational firms interested in business opportunities in the Middle East and North Africa.
Part of the attraction of working in Dubai as an expatriate may be the lack of income tax, housing provided by the sponsoring company, and exciting nearby countries to explore. Vacation time tends to be generous - up to 45 days at many multinationals.
Of course, as Dr. Azzam says, they are paying a price for the overborrowing that propelled the incredible real-estate-driven economic growth. While I would agree with him that Dubai will recover, I think it is still too early to assess the full cost of this strategy and how long it will take to return to at least some growth, though I doubt they will ever see the great growth rates of the last decade ever again, or at least for a long, long time.
Karl Moore