Effects of Global Financial Crisis on the United Arab Emirates

The world is recovering from the global financial crisis that started in 2007; the crisis is believed to have originated from the United States of America mortgage industry. The crisis did not remain within the boundaries of the United States but affected the world in one way or another. United Arabs Emirate is an Asian county situated in the Southwest of Asia bordering the Persian Gulf. UAE construction industry was one of the most hit sectors of the economy by the financial crisis; it was affected directly and because of the multiplier effect (Ambachtshee, Beartty & Booth, 2008). This paper discusses the effects of the financial crisis on the United Arabs Emirates.

Effect on UAE international trade

Of the late like, any other Asian country has been experiencing an increased economic growth rate: scientific invention and innovation has developed efficient and reliable communication and transport networks that have been used in international trade; the improved economic development of the United Arabs Emirates has been attributed to improved international trade in the country.

When the crisis hit the world, international markets were reduced thus the country’s trade with other countries was hampered. When the country could not attract international markets, human disposable incomes were highly reduced, when disposable income is reduced, people were not willing to own homes, house ownership was not a priority anymore. In Dubai, the region’s largest economy, the construction industry was expected to have shrunk by 4.00 percent (Ruppel, 2010).

One of the major export from the country is fuel and fuel products, these products are exported to be used in factories in other economies; the crisis has resulted in a reduced rate of growth of other countries’ populations thus there was reduced demand for oil and oil products. Reduced demand for fuel resulted in low foreign exchange that resulted in a balance of payment difficulties.

The graph below shows the market price of oil products between 2007 and 2011; it is an indication of how the prices of fuel had deteriorated to be a disadvantage of UAE:

The United States is the world’s largest trader but was the most hit country with the crisis; United Arabs Emirates did not have the markets for its products. The result of the reduced market includes loss of income to the country, loss of employment to those people who were directly involved in international trade, and less growth in the home industries. When there is a slowed growth in industries, then there are no new structures made for the manufacture of goods and services; alternatively, industries invest in real assets among other investments models; with the low profits then the industries were not investing.

One of the major sources of construction industry construction funds is from pension schemes operated by different companies; when the rate of employment reduces then there is reduced employment thus the amount of pension is reduced, the rate of investment in the industry thus reduces (Cooper, 2008).

Effects on the countries social welfare and living standards

The effect of the crisis in the construction industry was much felt in 2009, when Dubai World, a government-owned house ownership company deferred payment of its debts quoting financial difficulties.

The crisis resulted in a slowed economic development thus the economy was not able to meet its population needs: with slowing economy, one of the major impacts is deterioration in the living standard, this is because many jobs were lost as trade among countries was affected negatively, and companies were forced to lay off workers. Families’ living standard deterioration brought psychological suffering. The deterioration of family is potential to own a home or rent good apartments deepened their worsening living conditions: the sector growth was reduced and it could no longer produce facilities that were of high quality as well as charge them cheaply.

As governments tried to finance their budget deficit, the main area that suffered was the developmental budget. Infrastructures were delayed and their budget was sliced because of lack of funds. This led to slowed development and increased poverty. Insurance and banking companies were largely affected and many are they that seek for bailing out by the government. The lending rate and money available for lending were reduced. The confidence of the people in the government was reduced and the political environment was unfavorable, an element that lends to leaping economies. This led to reduced gross domestic earnings of the world. Companies closed down and trade suffered greatly

One of the sectors affected by the economic situation in a country is the construction industry, when the economy is doing well, several companies and individuals are willing to invest in the industry. The government also plays a major stake if the economy needs more facilities in either housing or infrastructure. With the crisis the demand for these commodities was reduced, people, firms and the government has reduced operation and thus they are required not construction infrastructures. In the UAE resource-constrained economy, demand for certain products plays a major role in the determination of whether funds will be invested in the country or not; the crisis created a state of no demand for infrastructures thus the industry suffered from that angle.

Effects on economic growth and their effect on the construction industry

One obvious result of the global financial crisis is the reduction of disposable income among the population of a country; when there is limited money to use, then the purchasing power reduces. United Arabs Emirates purchasing was reduced thus consumption in the economy was reduced. Reduction of consumption has an effect on the demand side of the economy where people consume fewer commodities than in an ideal state.

The consumption is by both locals and international market; for a company to develop and get the drive to construct other facilities whether they are an expansion of the existing ones or opening new operating points, they need to have a market for their goods. Since the market was not there then they hardly expanded their operation. This affected the construction industry directly. Other than the direct effect, the case was made even worse by the multiplier effect; when a certain factory or industry is not performing well, then the government does not need to open up the places for further development, this deepened the construction industry (Park, Cona & Fingess, 2008). The effect of the crisis was expected to have a 20-30% decline between 2007 and 2009; the chart below shows Dubai Land transitions an indication of un-development taking place in the region:

The effect on insurance and banking

Insurance and banking companies were largely affected and many are they that seek bailing out by the government. The financial sector is the major support of the construction industry since less of projects are financed directly from one’s savings. When the crisis hit the world, the sectors felt the heat and reverted in their efforts to remain afloat. The lending rate and money available for lending were reduced; this resulted in an increased interest rate.

With an inactive financial crisis, the world economy cannot grow; the confidence of the people in the government was reduced and the political environment was unfavorable, an element that lends to leaping economies. Banks were not willing to lead people to develop, and when they had a facility, their interest rates were high as a strategy to reduce borrowing. When banks are lending, they ask for securities for the loans, the value of land and constructions had gone down thus the amount of financing that the people could get from the banks was minimal.

The construction industry is capital intensive industry thus when the amount of loans offered by banks is reduced then the sector is affected (Gowealthy.com). Companies and individuals deposit their funds in insurance bodies for various policies, when the economy is running slow, then the deposits in these policies are reduced. One way that insurance and banks use their deposits is to invest in the construction industry, they find the investment noble and worth the investments. With the crisis, confidence with the banks and insurance bodies was hampered thus they experienced reduced deposits the final effect was a trailing construction industry (Jian, 2008).

The graph below shows the trends that were in the major banks in the area and how they had been affected by the crisis.

Conclusion

The global financial crisis, which started in 2007, has affected the UAE politically and social-economically, the country experienced slowed economic growth rate and its population living standards deteriorated. The construction industry was largely affected since disposable income from the government, firms, and individuals was reduced. The industry dropped by approximately 4% in 2009. The construction industry was affected directly or by the multiplier effect of other industries; though the world is recovering, the industry is trailing behind.

References

ALNEFT (2011). One Graph to Rule them all – Oil Price Forecast 2010 – 2011. Web.

Ambachtshee, K., Beartty, D., & Booth, L. (2008). The financial crisis and rescue. What went wrong? Why? What lesson can be learned? Toronto: University of Toronto.

Cooper, P. (2008). What does the global financial crisis mean for Dubai real estate? Web.

Jian, P. (2008). The global financial crisis takes its toll on UAE. Web.

Gowealthy.com. (2010). How hard will UAE’s economic growth be hit by the Global Recession? Web.

Park ,R., Cona, K.,& Fingess, M. (2008). The crisis of global environmental governance: towards a new political economy of sustainability. New York: Wiley.

Ruppel, C. (2010). Global Financial Crisis: Corporate Governance and Regulation” Dimensions. Web.