The Rise Of The Emirates

The following is from this year’s Note 19 of The Kelly Letter, which went out to subscribers last Sunday morning.

The first thing one notices on an Emirates flight is the lack of Emiratis among the cabin crew. Beneath the uniform’s exotic red hats and white veils are black, white, and yellow faces from around the world. A flight attendant from South Africa told me on my flight to Dubai from Tokyo that Emirates boasts the most diverse staff of any airline in the world. All of them speak English, and there’s somebody on staff who can handle any major language needed by passengers. The amenities on the flight are famously luxurious, featuring headliners like an in-flight shower spa and gourmet cuisine on Royal Doulton china, and the service is superb. Everywhere I turned, somebody smiled at me and pre-empted my requests with uncanny powers of prediction.

The airline is headquartered at Dubai International Airport, and serves as proxy for why Arab business influence is rising. The United Arab Emirates (UAE) has oil reserves that are the seventh-largest in the world. The country is redirecting this profit into impressive national development and global investment projects. Dubai is home to the world’s tallest man-made structure, the Burj Khalifa, which tops out at 2,722 feet at the tip. The top floor is 1,918 feet high. Around it are other modern structures along the Sheikh Zayed Road, which lights up beautifully at night.

Given the international leaning of the culture and its focus on quality and service, it makes sense that Dubai is a major global city and important business hub. Passenger traffic at Dubai International Airport is growing at a rate of 15 pct annually, with more than 70 million passengers per year. The only airport that handles more international passengers is London Heathrow. Narita in Tokyo sees half as many as Dubai; JFK in New York sees a third.

According to Babu Das Augustine, Deputy Business Editor of Dubai-based Gulf News, the UAE economy grew 4.7 pct last year, its fastest clip since growing 9.9 pct in 2006. Credit goes to higher oil production and a resurgence in domestic demand. The Institute of International Finance (IIF) expects the growth to continue throughout this year. The mixture of revenue is changing, too, underscoring the general sense that oil profit needs to be parlayed into non-oil lines of business, usually dubbed “non-hydrocarbon growth.” This year, for example, oil revenue is projected to decline while the non-oil sector grows 5.2 pct.

The director of IIF Africa/Middle East, Garbis Iradian, told Gulf News last week, “The completion of major infrastructure projects and the preparations to host the Expo 2020 should keep economic growth in Dubai above 5 pct in the coming years. In the context of moderating growth rates in emerging economies and relatively slow growth in the developed economies, the UAE growth rate ranks among the most robust around the world.” The government is being careful to shepherd growth in a way that avoids repeating the credit bubble trouble of 2007 by enforcing regulatory limits on loans and demanding healthy loan-to-value ratios on property debt. Current growth is not the vaporous variety emitted by excessive credit.

Indeed, major financial indicators including stock and real-estate prices, business confidence, and declining spreads on sovereign credit default swaps (CDS) indicating faith in government debt, all point to a healthy deployment of oil wealth into non-oil enterprises.

This hasn’t been lost on the world’s wealthy. NatWest International Personal Banking issued a report called “Quality of Life” in which it concluded that Dubai is attracting thousands of young British professionals for a variety of reasons, not least the zero income tax. Couple the absence of the tax man with plenty of high-paying jobs in the booming business sector, and Dubai becomes cat nip for the aspirational. It’s thrown open its arms to the wealthy and the wannabe wealthy, and they’re showing up by the limo load. Just after Australia and Canada, the UAE is the third most popular destination for British expats. A recent headline in the Daily Telegraph asked, “Is Dubai the new Spain for British expatriates?”

Beyond the financial appeal, what do the Brits find so appealing about Dubai? Its high rankings across a number of lifestyle indicators, according to the NatWest study, including availability of consumer goods, entertainment, food, law enforcement, public transportation, sanitation, housing, public services, the school system, and so on. In other words, it’s a darned comfortable place to live while amassing or enjoying a fortune.

In some ways, it’s more tolerant of diversity than its Western counterparts. I asked an African Christian living in Dubai if she experienced any difficulty coexisting with Islam. She said no. I asked how a Muslim in Dubai would react if I wished them a Merry Christmas. She said they would wish me one as well. This I found interesting, considering that I’m reprimanded for wishing people a Merry Christmas in America, and advised to stick with “Happy Holidays” instead. “Everybody knows holidays are just cultural differences,” she told me. “Nobody should feel proselytized when being wished a pleasant holiday from any background.” Right! Pass the word.

Among Dubai’s non-oil endeavors is gold refining. Commodity trading is in the region’s DNA, evidently. In the desert just outside of the city, one of the world’s largest gold refineries is under construction. With demand for the metal moving toward Asia’s growing economies, other places are becoming more interested in catering to the buyers rather than buying the commodity itself. Call it the old pick-and-shovel strategy of winning a gold rush. Kaloti Precious Metals is spending $60M to help move Dubai beyond just trading the metal to refining and clearing it. The Dubai Gold and Commodities Exchange will introduce a spot gold contract next month.

Analysts are characterizing this transition as a brilliant use of Dubai’s portfolio of assets. It’s close to consumers in China and India, maintains a low-tax backdrop, and runs an efficient transportation system. Pair gold with these factors, and it’s easy to see why Dubai thinks it can carve out a niche for itself in an industry long dominated by Switzerland, which refines more than 3,000 tons of gold per year, about half of the global market. By comparison, the UAE refines 800 tons. Last year, almost 40 pct of the planet’s physical gold trade passed through Dubai, but the area has lagged in the refining business.

Kaloti and others are hoping to change this. The new refinery will deliver an annual capacity of 1,400 tons of gold and 600 tons of silver, more than trebling the output of any of the UAE’s current refineries.

The UAE is working hard to diversify its wealth beyond the oil industry that made it rich. It’s luring worldwide talent to its economy with generous compensation, low taxes, and a pleasant lifestyle. It’s spawning investor groups that troll the world for new businesses boasting high returns on investment. All throughout Europe, the influence of Emirati investment capital is being felt.

There’s an opportunity for some investment group in Dubai to get a leg up on the competition by sending envoys into target markets. If I were in charge of the operation, I would instruct the envoys to live in and love the destination, to learn the language, make friends, and send me letters explaining everything they’ve come to admire about their new home. Once those letters glowed warmly enough, I would fly to meet the envoy and discuss together what type of business the market needed and how our capital could best be used to make it happen. I would send gregarious people, not analytical ones. The analysis comes later.

From what I saw in Dubai, from what I experienced on Emirates, I have a feeling somebody in the UAE is going to catch on to this. Profit arises from a combination of heart and head.

Yours truly,

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