When an electric kettle rolls off the assembly line in Guangdong, its journey is only just beginning. From that assembly line it will travel by truck to the port of Hong Kong where a freighter will carry the kettle to a distant Middle Eastern port.
Whether bound for Cairo's Khan el-Khalili market or a Riyadh Carrefour, the kettle will likely see Dubai on its journey. Dubai has always been a regional trading centre and, in the last decade, it has emerged as the third-largest trans-shipment centre in the world after Hong Kong and Singapore. With a 2008 throughput of 11.8 million twenty-foot equivalent units (TEUs) - an 11% increase year-on-year - the emirate's two ports are the busiest in the nearly 10,400 kilometres between Singapore and Rotterdam.
In addition to Dubai's booming port traffic, air freight is also growing. Dubai International Airport handled 1.8 million tonnes of cargo in 2008, up 9% from a year earlier. Though growth will likely be down this year, the Emirate continues to invest in the infrastructure necessary to ensure its place as the top logistics hub between Asia and Europe.
"Dubai is really doing what it's done for hundreds of years, just in a lot larger numbers," said Richard Vaughan, Emirates Airlines' senior vice-president of commercial operations for East Asia and Australasia. "It's a [good] transit point for goods. We fly in white goods from Asia, they're broken down and put on dhows and sent to East Africa."
Increasingly, China is an important link in the trade chain. For the first nine months of 2008, the top three Middle Eastern exporters to China by value were oil-rich Saudi Arabia ($27.3 billion), Oman ($10.1 billion) and Kuwait ($4.5 billion). Meanwhile, Chinese exports to the region by value went predominantly to the UAE, as well - it bought $19.6 billion worth of goods compared to Saudi Arabia's $9 billion and Egypt's $4.9 billion. China's main imports are natural resources, including oil, while its exports are primarily finished manufactured goods including Guangdong-made electric kettles.
Emirates Airlines and shipping companies are not the only ones benefitting from Dubai's central role in Middle Eastern trade. Pro-investment government policies and proximity to customers is attracting the global trade banks.
Enter the traders
Trade banks that want to open an office in Dubai can take advantage of the Dubai International Financial Centre (DIFC) -- physically located onshore but operated as if offshore. Financial institutions incorporating inside the DIFC are exempt from UAE taxes and operate under a separate financial regulatory framework.
Trade bank clients are attracted to the Emirate's multiple free trade zones. Zones include the 58 square kilometre Jebel Ali Free Zone and the under-construction Dubai World Central, both adjacent to the massive Jebel Ali Port and the future Al Maktoum International Airport (See box on following page).
Bringing both ends of the trade chain together is a win-win for Dubai's financial centre aspirations and banks' regional ambitions. But the economic crisis is making additional trade finance opportunities evident within the UAE's domestic market.
"The need for foreign currency financing is growing substantially, especially for those companies that are conducting import and export businesses," said Asif Raza, J.P. Morgan's Middle East and North Africa head of treasury and securities services. "They need access to US dollar financing and at a competitive rate."
One effect of the economic crisis has been a shortage of foreign currencies, especially US dollars, at UAE banks. During the past few years, foreign investors deposited significant amounts of US dollars in local banks, betting the country would de-peg its currency. When it became obvious the government would not float the dirham in the near future, those dollars started leaving.
The flight was accelerated by the crisis. In 2008, Morgan Stanley Research estimates that 66.2% of UAE banks' net foreign assets left the country. This is compared to 2007 when net foreign assets held by the banks grew by 3.1%. The credit crunch has done more than just speed up the flight of capital; it has also increased the need for ancillary trade financing facilities.
"Importers have a problem with increasing inventory," said Kazuo Yoshimura, Sumitomo Mitsui Banking Corporation's head of structured and trade finance for Turkey, the Middle East and the Commonwealth of Independent States (a regional organisation of former Soviet Republics). "In the past, a local bank's programme didn't need inventory finance but now, importers need inventory finance. This is an opportunity for some banks that still have credit capacity."
The opportunity for international trade banks to fill in the gaps in local banks' services also opens the door to partnerships. "Another good trend is the emergence of foreign banks and local banks working together to arrange risk mitigation and financing solutions for local trade transactions," said Raza. "Local banks understand the local corporates better than foreign banks."
Part of the recovery
"Trade is an area that is integral to the growth and recovery of the markets," said Raza. His view is shared by everyone from the trader based in Dubai to the presidents and prime ministers of the Group of 20.
Dubai's ambitions seem little, if at all, dampened by the global drop in trade. With an expansionary 2009 budget increasing spending on infrastructure and the issuance of a $20 billion bond measure easing concerns over its credit rating, the emirate has signalled it is willing to invest in its future as a regional hub
"The [additional infrastructure] funding is being used on the critical projects that need to move ahead," said Rimzie Ismail, general manager of marketing for Dubai Airports. "We already have the money for [Al Maktoum International Airport] but if there is a need we would get it as well."
If preliminary 2008 trade numbers say anything, there is little for the Emirate to worry about. According to the World Trade Organisation (WTO), the UAE's total trade increased to $391 billion in 2008, up 42% from a year earlier. This year the WTO predicts world trade will decline 9%. If the decline is fully realised in the UAE, it would mean a trade volume of $356 billion; still a buoyant 29% higher than 2007.
Dubai's selling point as a regional trade hub remains strong. Geographically located within an eight-hour flight from approximately 5.8 billion people, it is literally located at a crossroad of the world. Something airlines and shipping companies have already acknowledged and capitalised on. "Through Dubai we can handle any type of trade flow, be it south-to-north or east-to-west," said Yoshimura. And these flows the Emirate will continue to handle, albeit with possibly a few less Guangdongese kettles this year.
Read more of this story on Page 2
Build during the recession, reap the rewards during the next upturn
Dubai's 2009 budget increased spending 42% year-on-year. The bulk of those dirhams will go to the Emirate's infrastructure, which, while impressive when compared to the likes of India or Thailand, lags behind much of the developed world. Specifically, Dh17.1 billion ($4.6 billion) will be invested in water, power, road, transport and port infrastructure projects.
As the logistical centre point for the Middle East, Dubai needs high-quality infrastructure. "Logistics is [one of Dubai's] key service exports," said Simon Williams, HSBC's chief gulf economist. "Jebel Ali [port] is a genuinely world-class facility; both the port and the free zone around it."
The ancillary infrastructure to support the Emirate's role as a regional business and logistics hub is a must. Opening this year is the nearly 53-kilometre metro line stretching from Dubai International Airport in the north to Jebel Ali in the south. Next year the first phase of the new Al Maktoum International Airport will open.
According to Ernst & Young, the demand for infrastructure derives not only from Dubai's future ambitions but from the region's economic and population growth. Though population growth (through immigration) will likely be off owing to the recession, improvements in power, water and education infrastructure will benefit locals while improved air, road, rail and sea links will make the Emirate all the more marketable. And these will be precious assets when the economy rebounds.
"Given the current world scenario, we're not in as much of a hurry to build Al Maktoum Airport because we feel we can cope with the projected traffic and we can stagger construction so as to not push ourselves," said Rimzie Ismail, general manager of marketing for Dubai Airports. "Al Maktoum was always designed in a way that we can build it on a needs basis. If the market demands it, we will build it."
Al Maktoum is Dubai's new airport city. Abutting Jebel Ali, when completed it will boast six runways, an annual passenger capacity of 120 million to 150 million and an annual cargo capacity of 12 million tonnes. By comparison, the existing Dubai International Airport has two runways and, when it is fully built out in 2012, an annual passenger capacity of 70 million (it handled 37.4 million passengers in 2008) and annual cargo capacity of 2.1 million tonnes (it handled 1.8 million tonnes of cargo in 2008).
Recession or no recession construction continues apace on Dubai's various infrastructure projects, using the downturn to build for the future. "Yup, yup, there's no delay," said a chipper Ismail. "We're going ahead as planned."
