It’s been called Hong Kong of the Middle East.
Like Singapore or Monaco, it’s one the world’s last city-states.
Built on the sandy marshes of the south Persian Gulf, Dubai is one of seven principalities that make up the United Arab Emirates (UAE). Although it holds itself out as a constitutional monarchy, it has been ruled by the Al Maktoum dynasty since 1833.
During the real estate surge of the past 10 years, Dubai has captured the imagination through a building program unmatched in grandeur. At the height of the boom, 24 percent of the world’s construction cranes – 30,000 of the 124,000 available worldwide – were at work erecting Dubai’s hyper-modern skyline.
Dubai is like Las Vegas on steroids.
As of the end of 2008, Dubai World, the quasi governmental authority behind the throne of Mohammed bin Rashid Al Maktoum was at work on almost half a trillion dollars of new development in the tiny coastal emirate. The sheikdom nestled on the edge of the Arabian Peninsula seemed to know no bounds.
The conglomerate is involved in international projects from Gulf banks and ports in 50 countries to luxury retailer Barney's New York and a grandiose six-tower hotel-entertainment complex in Las Vegas. The government ran afoul of American politics when the Bush White House approved a plan that would have allowed Dubai Ports World to take over the management and operations of several east coast commercial harbors.
Jitterbug Makes a Comeback
Today, construction has come to a halt as the city-state’s chief conglomerate tries to restructure nearly $60 billion in outstanding debt. Its potential for a debt default sent jitters through world markets on concerns of new setbacks for Dubai World's large international bank creditors just as they are recovering from the global financial crisis. While Dubai’s astonishing growth was built on the back of the oil industry, revenues from energy production account for less than 6 percent of the emirate’s revenue. Property and construction, trade and financial services make up the bulk Dubai’s economy. Despite massive infusions of cash from the personal coffers of the monarchy and its many Middle East patrons, Dubai’s fortunes crashed as real estate prices cratered.
Dubai's ruler has tried to reassure investors in his first public statement about Dubai World's debt crisis. UAE President Sheik Khalifa bin Zayed Al Nahyan also maintained his country's economy was healthy.
Analysts say Dubai World's debt crisis is a symptom of a broader malaise in the city-state. Unlike neighboring emirates, Dubai cannot fall back on its dwindling oil and natural gas resources.
For the past decade, it has been the freewheeling boomtown, racking up debt as it built extravagant artificial residential islands, malls complete with indoor ski slopes and the world's tallest tower. It has built everything, yet produced nothing.
Now the sandpiper has come to call, and Dubai may not have the resources to stave off financial collapse. Dubai’s Financial Market sank another 5.61 percent today after plunging 7.3 percent on Monday. Neighboring Abu Dhabi's bourse closed down 3.57 percent following an 8 percent slide a day earlier.
The Other Recession Is About to Drop?
To satisfy its creditors, the state-run conglomerate may be forced to auction off some of its most prized possessions including Emirate Airlines, the only luxury carrier to provide uber-first class cabins that include private bathrooms complete with showers.
Several analysts believe that the crash in Dubai is a precursor to the second wave of the world credit crisis. They fear that banks from Europe and China to South Asia and Japan have yet to disclose all of the bad commercial debt carried on their books.
Today, the Bank of Japan held an emergency meeting, bowing to government pressure, to pump short-term funds into the country’s banking system in a renewed bid to revive lending and breathe life into the moribund economy. Just as other major economies are contemplating an end to stimulus and support, the world’s second largest economy is redoubling its efforts to prevent a financial relapse.
Whether the credit crunch in Dubai is symptomatic of a deeper world financial problem will continue to be a hot topic among financial wonks. In the meantime, Dubai residents may have to start driving their own cabs or digging their own trenches as hundreds of thousands of foreign workers idled by the crash return to their native countries.
For the last ten years, the desert kingdom has been the resort hot spot on the Persian Gulf. Celebrities like Tiger Woods, David Beckham and Roger Federer flocked to the tony clubs and lavish surroundings.
Tiger got $25 million to lend his moniker to a golf course bearing his name. With trouble brewing at home, Tiger may ask the emirate to forego the payment in exchange for granting him political asylum from his wife.
With the emergence of this latest crisis, Dubai is in danger of slipping from its superstar status to just another joke in the desert.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
