Thursday, August 06, 2009

Dubai boom ends as one cheque in four bounces

Up to one quarter of all the cheques written in Dubai may be bouncing as expatriate residents in the Gulf state struggle as the economy slows.

Blank cheques are used to underwrite financial arrangements, such as credit cards, in Dubai, guaranteeing future payments such as a rental agreement or bank loan.

This system arose in the United Arab Emirates (UAE), which includes Dubai, because of the difficulty of doing credit checks on foreign workers. As many of these workers have now lost their jobs in the recession, the number of bounced cheques has risen.

The penalty for failing to honour a cheque is severe and some people have ended up in jail. Dubai’s police chief said this year that about one fifth of all prisoners in the emirate were there because of bounced cheques. Most of these are likely to be foreign workers.

Official figures for the first four months of this year showed that 544,196 cheques bounced — equivalent to 5.7 per cent. However, analysts believe that the total figure may be much higher once all private sector cheques are included.

As many as one in four cheques could be bouncing, according to Ghanem Nuseibeh, senior analyst at Political Capital, a consultancy firm. His estimate is based on data from local banks and figures for departing expats. Cheques are a fundamental part of the Dubai financial system — Mr Nuseibeh, for example, wrote 70 cheques to cover payments for his car.

RAK Bank, which operates in Dubai but is based in neighbouring Ras Al Khaimah, has said that 2,500 of its expatriate customers were leaving every month with unpaid credit card bills. These individuals were also likely to be leaving behind bouncing cheques for accommodation and cars.

During Dubai’s boom years, expatriates from around the world took advantage of cheap credit and a booming economy to live a luxury lifestyle. Easy credit arrangements meant that they could buy penthouses, motorboats and expensive cars with little or no scrutiny from lenders. When the economy slowed, many foreign workers lost their jobs or had their salaries cut and became unable to keep up with their payments.

Some abandoned their luxury cars at Dubai airport as they fled their debts and possible imprisonment. Some have been jailed while others have struggled to stay in Dubai.

“Many of the British expatriates in particular tried to hang on as long as possible to life there and sadly many have ended up writing bounced cheques, having their passports confiscated so they cannot leave the country and really living in appalling conditions in bedsits shared with maids, or even in cars parked in car parks,” Mr Nuseibeh said.

About 10 per cent of expatriates in the UAE have lost their jobs, according to a Yougov survey this month. This does not include the large number of construction and blue-collar workers who have also had their contracts cancelled.

The large number of redundancies has led many to forecast that the population of the UAE — and Dubai in particular — could shrink this year, partly because visas are revoked 30 days after leaving a job, prompting many foreign workers to leave.

UBS, the Swiss bank, has estimated that Dubai’s population of 1.5 million could fall by 8 per cent this year while Political Capital estimates the decline could be between 14 per cent and 28 per cent.

The UAE economy grew rapidly in recent years, driven by high oil prices and Dubai’s construction and tourism boom. Economic growth is now expected to fall to minus 1.4 per cent this year before recovering to 4.1 per cent next year.

Many of the large construction projects in Dubai have stopped as a result of the downturn. House prices and rents have reportedly fallen by about 40 per cent.

Engulfed in the downturn

• Dubai is one of the seven emirates and the most populous city of the United Arab Emirates (UAE) Its main revenues are from tourism, property and financial services Property and construction form a large part of the Gulf state’s economy. Revenues from petroleum and natural gas account for less than 6 per cent of Dubai’s $37 billion (£22.5 billion) economy. It is estimated that Dubai produces 240,000 barrels of oil a day as well as substantial quantities of gas from offshore fields.

• Dubai’s oil reserves are expected to be exhausted in 20 years Property values, construction and employment have all fallen as the economy has slowed As of February 2009, Dubai’s foreign debt was estimated at $100 billion, which means that each of its 250,000 UAE nationals are responsible for $400,000 in foreign debt

No comments: