Dubai’s economic miracle built on sand

October 6th, 2008

Dubai towers; image courtesy of Time Inc

Cracks are starting to appear in the the “economic miracle” that was Blingopolis, otherwise known as Dubai.

The over-stretched and hugely ambitious desert emirate, led by the autocratic al-Maktoum family, last week received an $15bn emergency bail-out from its near neighbour Abu Dhabi (see this column by BreakingViews’s Una Galani).

This is one of several warning signs that Dubai, just like most of the developed world’s banks, has been over dependent on leverage for far too long and is now probably headed for the economic intensive-care ward.  As I pointed out in an earlier blog post, the emirate’s frothy property market has been overdue a correction for some time.

Despite the lack of a free press, even the locals are beginning to recognise this fact. They are also getting exasperated by the inability of Dubai’s infrastructure to cope with over-development — including the raw sewage that is said to be spewing out onto Jumeirah beach. Higher inflation (Merrill Lynch recently put U.A.E. inflation at 13%) is also undermining the cost competitiveness of locating in the emirate.

It was always inevitable that Dubai would start to feel the pinch from the global credit drought. Now it is happening.

In the past three months, the spread on Dubai’s credit default swaps (CDSs) has doubled to 300 basis points, almost three times that of its oil rich and better positioned neighbour, Abu Dhabi. Basically this means that global lenders and funders have become increasingly reluctant to lend to the emirate (which unlike Abu Dhabi, has no natural resources to speak of). Soon, this source of revenue is likely to dry up.

Dubai’s hubristic property developers are going to struggle to service the huge debt piles they have accumulated in recent years – and they are almost certainly going to have to rethink their approaches. Existing mega-projects in Dubai will have to be mothballed, while new ones will probably have to be strangled at birth.

Nakheel, the Dubai-based developer behind tasteful and probably transient projects such as the archipeligo of artificial islands off Dubai’s coast, has $3.5bn of debts to refinance. I expect it is going to find this a struggle.

Bizarrely, given the precariousness of its financial position, Nakheel has just announced plans to build a $35 billion tower which, at one kilometre high (3,280 feet), could be the tallest in the world, dwarfing the emirate’s already absurdly tall Burj Dubai project.

This counter-cyclical hubris appears to have been  prompted by Saudi Arabia’s plans for a similarly high 1km tower in Kingdom City, near the Red Sea port of Jeddah. However it is almost certain to be followed by nemesis.

Dubai is unlikely to experience a total economic meltdown, at least for now. It’s big sister down the road — Abu Dhabi — will probably be willing to continue to bail it out, at least for the time being. But I suspect that Sheikh Mo will have to display a little bit more humility when talking to his better off counterparts along the road. I also suspect that many of the emirate’s overseas ventures are going to come unstuck as the global slowdown intensifies.

This ought to be an opportune moment for the army of white-collar westerners who continue to enjoy a hedonistic lifestyle in Dubai, largely at the expense of 700,000 migrant labourers from India, Bangladesh and Pakistan, to reassess their commitment to the emirate.

Read earlier articles by Ian Fraser on the coming crash in Dubai:

Short URL: https://www.ianfraser.org/?p=656

Posted by on Oct 6 2008. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

2 Comments for “Dubai’s economic miracle built on sand”

  1. Isn’t Dubai ruler is also married to one the daughters of the Abu Dhabi ruling family? He was known to have been close to the late Sheikh Zayed. So perhaps they will bail Dubai out….

  2. […] applause and of breathless whispers about how cool it is in business circles. Dubai’s economy has exploded in recent years, they tell me. Thank Goodness Dubai’s economy has boomed in the face of the Arab […]

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