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Dubai is a well developed country with strong economy, which has an exceptional political structure. Advantageous external and internal factors were the reason of quick growth and prosperity of Dubai. However, recently it faced hard times; some economic indexes declined tremendously. Thus, the main aim of this paper is to research and compare three articles in order to examine reasons and consequences of Dubai crisis.
Dubai Financial Crisis: Causes, Bailout and After
Hasan Zubair (2010) conducted a research about causes of the financial crisis Dubai faced a few years ago. The author spotlights the multiple challenges for Dubai in recovering its economic situation, which is of exceptional interest to economists from other countries.
Strength and fast grow of Dubai economy can be explained by availability of cheap labor, rich natural resources, political stability and favorable business environment. Dubai financial market has been surprisingly stable during the worldwide economic crisis. However, in the middle of 2008 it collapsed.
According to Hasan Zubair (2010), real estate sector booming is the main reason of the economic crisis. Excess supply of real estate occurred in the market. It led to a deep decrease by 60% in the property prices. The amount of sales plummeted since profit margins were extremely low. As a result, Dubai generated a large international debt, which caused the drop in share prices on international stock markets. In order to pay debt obligations, U.A.E. Central Bank offered Dubai a bailout help ( Zubair, 2010).
The total debt of Dubai reached $59 billion. Therefore, $10-billion bailout did not cover even a half of Dubai debt. Consequently, in May, 2010 Dubai World went into agreement about restructuring $23.5 billion, which allowed main lenders to hold more than a half of the exposure. The length of the repayment period was extended to five years (Zubair, 2010).
The author considers Islamic bonds Sukuk to be one of Dubai crisis causes, although some critics disagree with this statement. The inability to pay Sukuk on time and negotiations of Dubai government about rescheduling the payment date took attention of many political institutions. The rating agencies downgraded Sukuk bond on the international stock markets, which caused the crisis beginning (Zubair, 2010).
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Therefore, the article demonstrates to Muslim countries what improvements need to be brought about in Dubai. The author recommends introducing expenditure tax for decreasing the waste of expenses. Additionally, the import of goods has to be reduced since it results in substantial money outflows. Finally, Islamic financial institutions are suggested to apply the investment facilities for a long term (Zubair, 2010).
Policy Coordination in Fiscal Federalism: Drawing Lessons from the Dubai Debt Crisis
Serhan Cevik (2011) researches the fiscal policy of Dubai, causes and consequences of the financial crisis in Dubai. It was a multifaceted event, severity of which can be explained with fiscal policies’ peculiarities and contingent liabilities build-up. Dubai crisis started with “bursting of the real estate bubble and the ensuing recession” (Cevik, 2011, p. 4). Consequently, public finance sector became less sustainable and risky, especially for governmental institutions.
The first part of the paper focuses on studying financial situation and features of the federal fiscal system of Dubai. Cevik (2010) argues that policy coordination in United Arab Emirates is not developed enough; therefore, he suggests coordinating subnational governments more efficiently. Cevic (2010) sees it as one of the steps to guarantee lasting fiscal sustainability. Moreover, the federal government of Dubai does not have adequate power over fiscal policy in the country, which also leads to the policy inefficiency (Cevik, 2011).
The key contribution of this paper is the in-depth analysis of Dubai market fiscal sustainability in general, as well as on subnational level. Cevic (2010) calculated the fiscal stance indexes using a complex estimation methodology based on decomposing GDP and extracting cyclical components. Additionally, the researcher provides personal chart illustrations of Dubai fiscal policy cyclicality (Cevik, 2011, p. 10-11). As a result, Cevik’s (2011) analysis of Dubai fiscal sustainability allowed him to illustrate predictions from 2010 to 2016. The predictions show quite a sharp decrease of indexes after 2011. Cevik (2010) also foresees the raise of Dubai’s debt to GDP ratio by about 50% (Cevik, 2011, p. 18).
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The author considers Dubai fiscal space as insufficient for handling macro-financial shakes. Cevik’s (2010) contention is maintained by increased dependency on real estate segment and low development of profit mobilization capabilities. Overall, the fiscal balance is quite unsteady, which might lead to decrease in sustainability of Dubai’s debt (Cevik, 2011).
The author conducted an impressive research on the topic. He contributes with explanations and graphical demonstrations of progressive ideas about future of the Dubai’s debt and fiscal sustainability. Therefore, the article has a valuable application for scientists and governments of other countries.
The Global Financial Crisis and Equity Markets in Middle East Oil Exporting Countries
Onour (2010) merely focuses on measuring the impact of financial crisis on Dubai and other countries in the region. The author states that Dubai was affected in the most severe way in the region. Thus, his research provides essential data about the state of Dubai economy, and its influence on other oil exporting countries. Onour (2010) gives quite a contradictory statement that Middle East countries’ openness to foreign investments is one of the factors that caused financial crisis (p. 13).
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The author argues that crisis in Dubai is different from preceding crises in terms of magnitude and global effect. Onour (2010) adduces the 56%-drop of international equity market capitalization in 2009 comparatively to 2007 (p. 2). The negative consequences of the debt crisis have also resulted in sharp oil prices drop. The portfolio losses enlarged from 18% to 42% after crisis. Moreover, there was a significant fall in share prices in Dubai financial market (Onour, 2010).
Onour (2010) admits that there was no research published on the consequences, which the global financial crisis caused for the capital market in the region. Therefore, the author presents his own calculations by employing “extreme risk measures of value- at-risk (VaR) and expected shortfall (ES)” (Onour, 2010, p. 4). For this reason, he uses descriptive statistic analysis. Hence, the author’s contribution to the insight of Middle East financial crisis and Dubai crisis in particular, is quite remarkable. Onour’s findings, expressed in his own calculations, reflect current financial situation of Middle East in general. However, the researcher does not provide any predictions about the future of Dubai financial market.
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The main part of the article demonstrates methods and parameters, which were used for the author’s calculations. Although the paper involves deep research by the author, it is not quite specific. The researcher did not provide separate information and figures for specific countries. However, the conclusion of the article includes results of risk estimations for six countries in the region. Nevertheless, the paper is a well-written research, which is based on the respectful sources of information and own findings of the author.
Three articles about Dubai crisis were compared in this review, which allowed determining the main similarities and differences between them. Additionally, I evaluated if the research questions were fully answered in the papers. To conclude the literature review, I mentioned questions, which concerned me after reading the articles.
The main similarity between these three papers is the research topic. The articles focus on getting insight about the financial crisis in Dubai. Moreover, the authors’ points of view on the causes of Dubai crisis are similar. However, each of them has some distinctive features. Hence, the author of “Dubai Financial Crisis: Causes, Bailout and After” highlights the main aspects, which developing Muslim countries can learn from Dubai crisis. Amongst them Hasan Zubair (2010) names implementation of expenditure taxation, decrease of import and financial institutions’ diversification.
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The main difference of “Policy Coordination in Fiscal Federalism: Drawing Lessons from the Dubai Debt Crisis” is the author’s using specific applicable economical calculations and providing some charts to illustrate the state of Dubai fiscal system (Cevik, 2011). Moreover, the unique feature of this paper is predictions about Dubai fiscal sustainability given by the author.
The study called “The Global Financial Crisis and Equity Markets in Middle East Oil Exporting Countries” is unique due to the author’s implying statistical methods of research. He uses descriptive statistical models to research stock returns in the Middle East financial sector.
The articles spotlight questions regarding the main factors, which caused financial crisis in Dubai. Moreover, they explain the crisis consequences for the country and Middle East region in general. The authors research the ways, which were used for diminishing negative impact on the national economy. Moreover, the researchers were pointing at the possibilities of preempting financial crisis.
All three articles have a strong and clear point. Therefore, they spot their audience and their purposes are obvious. The authors try to give the full insight of the situation in Dubai financial market and to help other countries to preempt crisis. They compare crisis of different countries and describe the way of handling it. It is of particular interest for me. Survey results in papers are utterly convincing. The researchers reinforced their studies by providing certain figures and illustrating the financial processes they describe in the articles.
Papers include detailed information on the selected topic. After reading them I understood more about financial markets and causes of economic crisis. I realized that I am mostly interested in the ways of applying the data provided. For instance, one of the research questions I want to study is comparing of financial crisis’s reasons in different countries. It can provide valuable information for other countries about how to preempt and avoid a crisis situation. Moreover, I would like to research all possible ways of coping with the economic crisis. Dubai might be a bright example for other regions with declines in economy. Finally, the future of Dubai economy after suffering such a deep crisis is fascinating research question for me.
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