The shock news of Dubai's debt problems raised fears of a return to the darkest days of the financial crisis as markets plunged across the globe, but analysts Friday downplayed the long-term risks. Markets in Asia, Europe and the United States stumbled as fears of bad debts bred fresh concern for the world economy after Dubai's shock request to suspend major loan repayments. Shaken investors were holding their breath Friday to see if the unexpected announcement from the once-booming Gulf Emirate would trigger fresh danger for the world economy, akin to the collapse of Lehman Brothers.
The US investment bank's demise in September 2008 sent shock waves around the world and heralded the start of the most painful phase of the global financial crisis. But analysts played down fears that the request from the Dubai government investment vehicle Dubai World to suspend debt payments for six months signalled an end to the global economy's fragile recovery.
The tragedy of the black hole in Dubai’s finances is that it has dealt a blow not only to its own reputation but to that of the United Arab Emirates -- and beyond that to the Arab Gulf as a whole. One might even go so far as to say that it has dealt a painful blow to the entire Arab world.
Until the crisis broke -- with the announcement last Wednesday that Dubai was seeking a six-month moratorium on the debt of Dubai World, its government-owned holding company -- the Arab Gulf was widely recognized as the real success story of the Arab world.
It had become a pole of modernity, of high-finance, of high-tech enterprise, of education and culture, of spectacular universities and museums. It had attracted international attention and admiration.
Above all, the Arab Gulf had become a magnet for tens of thousands of clever, well-educated men and women from other Arab countries, and for hundreds of thousands of Western expatriates attracted by the tax-free salaries and relaxed life-style. In Dubai alone, there are said to be no fewer than 120,000 Britons.
There is no doubt that Dubai is in a financial mess. Its many government enterprises will need restructuring, a process which has already begun. The Emir, Sheikh Muhammad bin Rashid al-Maktoum, is evidently taking things more firmly into his own hands. Three key men, closely associated with the city-state’s spectacular growth, have been relieved of their powerful jobs. They are Sultan Ahmed bin Sulayem, chairman of Dubai World, Mohammad Ali Alabbar, chairman of Emaar, the property giant, and Mohammed al-Gergawi, chairman of Dubai Holding.
The Emirate evidently expanded too fast and ran up heavy debts by embarking on vanity projects of doubtful financial viability, such as the 810 metre-high Burj Dubai skyscraper – the highest in the world -- and the artificial islands built in the shallow waters along its coast, to provide room for miles of luxury villas. These, in particular, could be vulnerable to a rise in sea-levels due to global warming. In view of the hot and humid climate in the Gulf, Dubai’s emphasis on high-class tourism may prove to be a mistake.
One should not, however, be overly pessimistic. In my view at least, the world has been far too quick to suggest that the glossy city-state is about to go bankrupt. This is far too gloomy a prediction. Dubai will undoubtedly weather the storm. It has many assets in many parts of the world, some of which can be swiftly monetised.
Its real advantage, however, lie in its location -- as an international trading and financial hub between East and West -- and in the quality of the people who have chosen to live and work there. These assets are bound to see it through.
Dubai has traditionally had close trading ties with Iran, a short distance away across the Gulf. Entrepot trade has been worth billions of dollars a year. But American pressure on international banks to deny credit to Iran has hampered this trade, and has no doubt been a factor, if a minor one, in the triggering the present financial crisis. A resolution of the West’s quarrel with Iran could be to Dubai’s great advantage.
The key to Dubai’s future lies undoubtedly in its relationship with its neighbour Abu Dhabi, run by the Nahayans, cousins of Dubai’s Maktoums. While Dubai has no oil, Abu Dhabi sits on one tenth of the world’s oil deposits and has built up a massive sovereign wealth fund estimated at $900bn. Abu Dhabi is the immensely rich powerhouse of the 7-member United Arab Emirates.
Will Abu Dhabi abandon Dubai in its hour of need? The idea is inconceivable. This does not mean that Abu Dhabi will give Dubai a blank cheque. Although it has no legal liability to come to Dubai’s aid, there is every reason to believe that it must eventually do so. The two emirates are bound together by a thousand ties of kinship and shared economic, financial and political interests. If Dubai were to go bankrupt, Abu Dhabi itself would not escape the backlash.
The real question, therefore, is the price Abu Dhabi will demand to bail out its imprudent neighbour. The price is likely to be political as well as economic -- that is to say Dubai may lose some of its independence as well as having to part with an equity stake in some of its major assets.
