I pegged Dubai as being fucked in the long term but I didn't think it would happen this quickly.Financial Times wrote:At the height of Dubai's recent boom, thousands of foreigners were arriving every day to seek their fortunes in this Gulf city of boundless ambition. Now, vehicles in the car park outside the airport gather dust as redundant expatriates abandon their wheels, fleeing home before they default on automotive loans and risk imprisonment.
Officials in the emirate were until the last few months unruffled by the credit crisis and a dramatic fall in oil prices, arguing that the services-led economy had not been affected. Indeed, they maintained, it would provide a safe haven for bankers and western companies suffering from the global downturn.
Dubai's six-year boom, which rode the regional petrodollar wave, was fuelled by the city's infrastructure and quality of life rather than by oil itself, of which the emirate has little. But the very openness of an economy built on finance and property investment now leaves it ill-placed to weather the storms raging elsewhere.
Amid a collapse of business and consumer confidence, financial and property companies have been shedding thousands of workers. The once steady stream of British tourists is also drying up as recession bites in the UK and sterling collapses against the dollar-pegged dirham.
The United Arab Emirates, of which Dubai is part, had to support the banking system with a Dh120bn ($33bn, £24bn, €25bn) package and bail out Dubai's two mortgage providers as the city's property bubble burst. Credit default spreads on the emirate's debt have since ballooned on worries that it might not be able to repay creditors without the help of the UAE's capital, oil-rich Abu Dhabi.
Bad headlines such as these are not part of the Dubai script of perennial growth. In response, Sheikh Mohammed bin Rashid Al Maktoum, the emirate's ruler, has formed an advisory council to steer Dubai through its greatest challenge since the Gulf was plunged into its own 1930s depression when the pearling industry collapsed.
Mohammed Alabbar, the charismatic chairman of Emaar Properties, a local developer, was chosen to chair the nine-man body. Unlike some of the relative youths who run the vast commercial enterprises linked to the government and collectively dubbed "Dubai Inc", Mr Alabbar has lived through other crises: he made his name turning around the fortunes of a Dubai business that went bust after the 1980s Asian property bubble. "We are going to tighten our belts, roll over and pay off debt, and be really trim over the next year," he says.
Sheikh Mohammed for years encouraged his top lieutenants to compete against each other to create the biggest and best developments. Such competition quickened the city's growth but it also encouraged increasingly grandiose projects founded on debt. As bullish growth scenarios began to confuse unusually loose credit conditions with a new paradigm in global finance, Dubai was seen as a crucial staging post in the shift in economic power from the west to emerging Asia.
Now, these officials are working together on the same committee to prevent the global slowdown leading to a Dubai meltdown. "We are now sitting together for the first time in a long time," says Nasser al-Shaikh, director-general of the department of finance and another advisory council member.
Mr Shaikh says ambitious growth targets of 11 per cent a year until 2015 have been reined back to 4-6 per cent. The government is also planning a fiscal stimulus that will increase government spending by 42 per cent this year.
But by the time the council went public with its findings in November, the rapid deceleration had given rise to speculation that Abu Dhabi, the richest member of the UAE, might have to bail out its flashier neighbour. Rumours spread that Abu Dhabi would only stump up the cash if Dubai ceded control of its successful airline, Emirates.
Federal support has come through folding Dubai's troubled mortgage companies into well-capitalised Abu Dhabi banks. There have been other direct discussions between Dubai and Abu Dhabi state companies, although none has reached agreement.
Sheikh Mohammed's Dubai International Capital fund, whose assets have shrunk sharply, briefly courted investment from Mubadala, the Abu Dhabi investment arm. No substantive discussions ensued, people close to the matter say, but the incident fuelled rumours of a bail-out. Well before the credit crisis raised questions about Dubai's solvency, Mubadala and Dubai Aluminium had been discussing equity restructuring of their joint venture, Emirates Aluminium, a vast smelter on the Abu Dhabi/Dubai border.
Dubai officials insist they will handle their own problems, only seeking federal support as a last resort.
T he most pressing issue for the emirate's reputation is restructuring its $80bn debt, around one-quarter of which is estimated to be maturing this year. Moody's has raised concerns that Dubai's high debt, at more than 100 per cent of annual gross domestic product, could force it to seek support from Abu Dhabi. Fitch, meanwhile, has downgraded the debt of rated state-linked companies in the emirate.
State-linked companies have already paid off more than $2bn in outstanding debt. The next big refinancing, Borse Dubai's $4bn loan, should provide an insight into the emirate's risk profile among international creditors.
The government also believes it has been understating GDP, making its debt levels look more burdensome than they are. A new 2007 figure of $70bn-$80bn will soon be announced as the statistical department upgrades 1980s methodology responsible for the current figure of about $50bn for 2006.
Bankers worry that the government remains in denial about the depth of its problems, given the slowdown facing its services economy and the closure of international financial markets. "Dubai is still just trying to market its way out of this huge hole," says one.
Dubai's property market, once a favourite destination of foreign investors, is in need of financial surgery as developers face a collapse in sales amid dire investor sentiment and banks shy away from providing mortgages. Prices fell 23 per cent between the third and fourth quarters of last year, according to HSBC's index covering mortgage issuance - although anecdotal evidence suggests some distressed properties are selling at about half pre-summer peaks.
Officials say that projects not yet sold to the public - as much as half all announced developments - will be shelved until market conditions improve. The government is also considering helping developers who are finding it hard to complete projects. But more building sites are falling silent as funds dry up, despite Mr Shaikh's assurances that government will not allow the city's skyline to be marred by half-built structures.
The authorities have yet to reveal a plan for financing the property sector, having assumed that deposit injections into the country's banks last year will be enough to revive lending. The government estimates that, at most, 34,000 units will enter the market this year, only half the number predicted by several research reports, including Morgan Stanley's August forecast in which the US bank also spoke of a 10 per cent price decline by 2010.
Chris O'Donnell, chief executive of Nakheel, a government-owned developer, says it has the resources to cope as it slows work on a variety of projects, such as the Trump Tower on its landmark Palm Jumeirah island. He paints a rosy picture of the company's first major refinancing, a $3.5bn Islamic bond, in November this year. Nakheel's credit default swaps indicate that investors are more worried about Nakheel than other parts of Dubai Inc. "The world will be a totally different place [by November] and we don't think there will be any refinance issues at that point," says Mr O'Donnell.
With local banks reluctant to lend, financing Dubai's property and infrastructure developments will remain its greatest challenge this year. "Possible access to federal [UAE] funding will drive how much Dubai can and cannot do to maintain growth," says Jeffrey Culpepper, Middle East head of investment banking for Credit Suisse. "If you look at all the mega-projects announced, without federal funding and with the current dislocation in the global finance markets, some will be hard to finish on schedule."
So Dubai's ambitions may rest not only on the health of the global economy, and with it a revival of the oil price, but also on the attitude of global banks and capital markets. Dubai has spent three decades transforming itself into a global city; its future now depends on the world reciprocating this grand vision.
This is a great time to have lots of young Middle-Eastern men suddenly displaced, while the economic bullshit they'd been taught is shattering around them.
