The Dubai Vision: from dust to bust

Until the 19th century, Dubai was a hot desert covered only with sand and dust, occasionally inhabited by nomadic tribes and sea pirates who landed on the coasts sometimes. In the beginning of 1800s, Al Abu Falasa clan established Dubai, which was a dependent of Abu Dhabi until 1833, when the Al Maktoum dynasty took over Dubai from Abu Fasala clan rulers. After that Dubai came under the British in 1892. Dubai became an important port of call for foreign traders and depended on its pearl exports until the 1930s, and its pearls industry was destroyed by the events of World War I and the Great Depression of the late 1920s.

Modern facilities like electricity supply, telephones and an airport were established in Dubai in the 1950s by the British. When oil was discovered in 1966, Dubai offered incentives to international oil companies and the affluent economy of Dubai was set up on oil revenues. Unlike its other neighbors, Dubai has only limited oil and gas reserves that contribute only about 6% of the economy. So it heavily depends on real estate development, tourism and trade for its revenues.

In 1971 Dubai, Abu Dhabi and five other emirates formed the United Arab Emirates (UAE) after the British left that year. As Dubai continued to grow from revenues from oil and trade, the Jebel Ali port was established in 1979, followed by Jafza (Jebel Ali Free Zone). During the Persian Gulf War of 1990 Dubai banks faced massive withdrawal of funds threatening to weaken Dubai, but, as a blessing in disguise, many trading communities from Iraq-invaded Kuwait and Shia unrest-stricken Bahrain moved their businesses to Dubai. Most importantly, Dubai reaped great financial advantage by providing refueling bases to allied forces lead by USA at the Jebel Ali Free Zone during the Gulf War and the 2003 Invasion of Iraq.

The success of Jebel Ali Free Zone was an inspiration and a model to establish Dubai Media City, Dubai Internet City, Dubai Maritime City and others, as Dubai had not much to expect from petroleum and natural gas exploration. So, Dubai turned to other sectors like real estate development for the well-heeled celebrity class of the world, port-development and investments worldwide, creation of the world’s most-sought after artificial island clusters with the most luxurious hotels, apartments, entertainment facilities, etc. Till recession hit the world economy, Dubai was riding on a real estate boom for six consecutive years.

With the real estate boom, Burj Al Arab (the world's tallest freestanding luxury hotel), Burj Dubai (currently the tallest building in the world), The Palm Islands, The World Islands, Burj Dubai and The Dynamic Tower, and many more modern structures were built. These, along with high inflation and a huge increase in cost of living made Dubai the second most expensive city in the Middle East and 20th most expensive city in the world. According to Morgan Stanley’s price index, property prices in Dubai rose 25% in 2008, after a rise of 79% in 2007.

But the global financial crisis forced speculators to sell out their assets in Dubai in view of the market collapse that crashed real estate prices by 41% in the first quarter of 2009, according to real estate consultants Colliers International. And the prices are falling continuously since then.

What is now described as the “Dubai Vision” is the brainchild of one man, Sheik Mohammad bin Rashid al-Maktoum, the ruler of Dubai, who has been accused of running the emirate single handedly, with the help of only his family and friends, and who failed to apply fair rules of open governance. He has outlined his ideas on development in his book “My Vision”. He has told the World Economic Forum last week that the worst of recession had passed for Dubai which was well-placed to continue its development plans. To prove that it was a white lie, news was released just before the Eid al-Adha and the UAE national day (Dec 2) that Dubai World could not pay a US$3.5 billion bond. The total debt of Dubai World being US$ 59 billion and the equally bust Dubai government being US$ 80 billion in debt, Banks in Asia and Europe quickly distanced them from Dubai.

The tell-tale signs of the current crisis were visible for the past several months. Accommodation on rent was unthinkable till last year, but slowly TO-LET boards started appearing on apartments and they are there in about 75% of the dwellings – not surprising as the original Dubai inhabitants are only about 20% of the population, the rest of 80% being expatriate workers, businessmen and others, most of whom have already left now. Roads used to be jammed with traffic and now they are almost deserted. One of the reports said that the airport had over 5000 abandoned cars left by people who escaped to their home countries. Pink slips for workers started many months ago and it is continuing. There are even stranded unemployed workers who cannot afford to pay airfare to catch their return flights. Those who are already employed in Dubai are afraid of losing their jobs any time.

Now the question in most of the financial circles is how the Dubai Bubble is going to affect others around the world. While European banks appear to have the most exposure to Dubai's debt - European banks hold about US$40 billion worth of exposure to Dubai - there are other broader implications. Besides, banks and companies from around the world who lent money to Dubai World are in a tight spot. The problem is not limited to Dubai, but it is considerably extensive considering it has presence in over 100 worldwide cites employing over 50,000 people around the world. Also thousands of big and small companies executing projects for Dubai World are going to be hit badly.

Now the whole hope is pinned on Abu Dhabi, one of the seven emirates and the oil-rich capital of the UAE, which has one of the largest sovereign wealth funds in the world. The Abu Dhabi Investment Authority (ADIA) invests the surplus government funds of UAE.

Al Jazeera and other news agencies report that Abu Dhabi is moving to bail out Dubai World on a selective basis. "We will look at Dubai's commitments and approach them on a case-by-case basis," an unnamed official told the Reuters, adding, "It does not mean that Abu Dhabi will underwrite all of their debts." It simply means that there will not be any immediate relief as Dubai would like to have. Instead of blanket assistance, the selective assistance is likely to disappoint many investors who expected Abu Dhabi to provide a safety net for Dubai.

Experts feel that the Dubai government has to come up with a clear plan in terms of what it wants to do to restructure its institutions and the debts related to them. According to Brian Caplen, editor of The Banker magazine, ‘Dubai's debt default is far smaller than the losses seen in the wake of the US sub-prime mortgage crisis in 2007’. The US exposure to toxic assets during the sub-prime mortgage crisis was US$1,000 billion.

The Dubai Model of development and financial planning were envious to most of the Persian Gulf countries, especially Saudi Arabia and Qatar, and some of them even tried to emulate Dubai, by aping ideas like establishing free trade zones, financial centers, advanced infrastructure, and inviting western capital and expertise. Some of them may even have financial exposure to Dubai. The larger world recession did not hurt many Asian countries much, but the much smaller Dubai Bubble may affect many Asian countries like India, Bangladesh, Sri Lanka, Pakistan, and many others as there is a huge chunk of expatriate population from these countries in Dubai and other Gulf countries. It is feared that other Gulf countries will tighten their purses and even stop hiring workers or even terminate the contracts of the present workers.