The collapse of the Dubai bubble
Was it expected? Well, it depends on the people you are asking. If you ask the rulers of the kingdom, then everything is and was hunky dory. If you ask the economists and people tracking the business of Dubai, it was always sitting on a debt bubble, ever willing to burst.
The tallest building, the biggest man made island, the biggest snow world in the midst of a desert, the largest mall in the world, the glitziest and grandest hotels in the world…the list of biggest, largest, tallest was never enough for Dubai to conquer. And in this context, the tiny city state of Dubai over leveraged itself and built an empire of debt. A debt that is bigger than its GDP now.
For a country that hardly has any oil, it had to build its future on something else than oil. So, the charismatic ruler of Dubai, Sheik Mohammed bin Rashid Al-Maktoum decided to move to finance, tourism to hedge its economy. Good vision no doubt, but its the execution where the fault lay. Mindless borrowing was fun and fine till the economic collapse happened in the USA. With the collapse of Lehman, Merrill Lynch and a host of big banks, the easy money dried up. And it was just a matter of time before which this was to happen.
Just three days before Eid, the Dubai government’s announced a six-month reprieve on debt repayments. This sent shockwaves through the world markets, as it raised doubts over the Gulf emirate’s ability to meet its financial obligations.
Dubai is being crushed under a mountain of debt. The emirate has a debt in excess of $80 billion which it incurred by expanding in banking, real estate and transportation. Dubai World with $60 billion liabilities has sought a six-month standstill on its debt repayment to all its lenders.
The Dubai government requested the creditors of Dubai World (one of three conglomerates that are backed by the emirate), to agree to a ‘standstill’ on repayments until May 30 2010.
On one hand the Finance ministers and bankers are saying that the markets are behaving erratically. But believe them at their own peril. These are the same people who just days before the collapse of the American banks proclaimed that all was well.
For most of this decade Dubai has been the Victoria Beckham of the Arab world–the biggest, glitziest, most heedless spender. It’s been the sort of place that invests $7.6 billion subway system few of its 1.6 million people are likely to use, the sort of place that builds artificial islands in the shape of palm trees, the sort of place that builds the world’s tallest skyscraper, the sort of place that sells designer seat-belts to encourage drivers to be safer in the very cars it wants them to trade in for a subway ride, and the sort of place where office buildings have been the Gulf’s most copious crop of the decade.
Dubai hasn’t limited its excesses to its corner of the United Arab Emirates. Through Dubai World, the Emirate’s investment arm, it partnered with MGM Mirage and invested in such projects as Las Vegas’ City Center, a 67-acre development that includes a 4,004-room hotel-casino, 2,400 high-rise residential condos, dining and entertainment venues and its own retail district. At $8.5 billion, it’s the most expensive privately financed construction project in the United States.
Now the bad news.
The Dubai subway has been running since September, albeit to empty quarters. A quarter of Dubai’s office space is vacant. Workers have taken salary cuts of up to 30%. The Emirati government is in debt to the tune of $80 billion to $120 billion. CityCenter? It’s “worth about half of what it cost MGM Mirage and Dubai World to build the massive Strip development,” the Las Vegas Review-Journal reported in October. lost half its value. MGM Mirage took a $1 billion write-down already, Dubai World ate a $348 million loss (so far).
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So, does that mean that the Dubai dream is all over? Not really. Am sure the more conservative cousin of Dubai, Abu Dhabi will come in with its oil money to rescue it. But Abu Dhabi has conveyed that the help will on a case to case basis.
That would mean that we would see lesser flamboyance from everyone associated with Dubai, at least for some time now.
More articles on the Dubai mayhem
Recession and debt dissolve Dubai’s mirage in the desert
Dubai’s Debt Troubles: Beginning of the Next Leg Down?
Dubai: an emirate in crisis
Sober ruler of Dubai whose vision is crumbling in the face of the storm