Dubai’s default should come as no surprise

Dubai’s default, expected in days, highlights the hubris of its developers and Emirate’s weak governance

Why are people shocked that Dubai is now widely expected to default on some or all of its $80 billion to $280 billion mountain of debt? Markets are apparently “spooked” but given the U.A.E. emirate’s behaviour in recent years,  a default either by the country itself or one of its state-owned enterprises was surely on the cards?

Ever since I started writing about ‘Blingopolis’ in June 2008 I’ve been aware that Dubai’s model — borrow huge sums to fund white elephants in the desert was flawed and storing up problems for the future.

None of the lenders to the emirate (which, predictably, include Citigroup and Royal Bank of Scotland) seem to have recognised that the debt mountain which Dubai, and in particular the Dubai World conglomerate, was building up might prove impossible to service. They also made the mistake of assuming that the debts of Dubai-owned companies such as Dubai World had an implicit sovereign guarantee.

 One might have thought lenders and bondholders would have noticed something was awry in October 2008. As global credit markets went into meltdown and expatriates started to flee the emirate, the already hugely-indebted Dubai-based developer Nakheel, part of Dubai World, announced plans on 5 October 2008 for the world’s tallest building — a 1 km (3,280 feet) high skyscraper that would have cost £21 billion.

Nakheel’s main motivations appear to have been hubris and a determination to outdo local rival Emaar, which is completing the 818 metre Burj Dubai down the road. Nakheel’s folly, named the Nakheel Harbour & Tower, was quietly shelved in January.

Dubai’s default leaves Sheikh Mohammed’s credibility in tatters

Dubai’s ruler Sheikh Mohammed bin Rashid Al-Maktoum may have succeeded in building a haven of comparative tolerance and liberalism in a largely Muslim fundamentalist region but, with Dubai’s default looking more likely by the day, his credibility as a businessman now lies is in tatters.

Sheikh Mo must have believed that using billions of dollars of borrowed money to fund hubristic construction projects in the desert using near slave labour and to support an ill-timed overseas acquisition spree stacked up economically.

He could not have been more wrong. Here’s how Norval Loftus, head of Islamic debt at Matrix Group in London, put it. “Dubai took on huge debt at the worst possible moment. It’s a pretty toxic combination of over-expansion and bad timing.”

There are parallels with the hubristic follies of RBS’s Sir Fred Goodwin and HBOS’s Andy Hornby. The difference is these two were able to rely on the UK government to step in and rescue their banks. There’s no certainty Abu Dhabi will ride to the rescue of its profligate brother down the road in the event of Dubai’s default.  At the weekend, a senior Abu Dhabi official made it plain, saying the oil rich emirate will “pick and choose” which of Dubai’s entities to help.

Here are the blog posts in which I raised “red flags” about the risk of Dubai’s default

“Nakheel, the Dubai-based developer, has $3.5bn of debts to refinance. I expect it is going to find this a struggle.” (Dubai’s economic miracle built on sand – 6 October 2008.)

“Nakheel has entered crisis refinancing talks with its consortium of banks. Some sources suggest that, unless it is bailed out by Abu Dhabi, Nakheel and by extension its owners, Dubai Inc, are destined for bankruptcy.” (Universe scrapped as world faces crippling financial issues – 9 January 9th, 2009.

This blog post was published on 29 November 2009. To read Christopher M. Davidson’s ‘The property bonanza that just wasn’t built to last’ in the Observer click here