Raymond Barrett

Sunday Business Post
By Raymond Barrett

Many analysts wrongly thought Dubai had sufficient funds to cover debt repayments for the current year, writes Raymond Barrett.

Dubai, once the posterchild of the global economic boom, looks like becoming the symbol of its collapse, with major question marks over its financial health.

The Persian Gulf emirate that became known for its record-breaking property and infrastructure developments rocked global confidence with the announcement that its Dubai World conglomerate is postponing debt repayments for six months.

The government-owned holding company, which oversaw such marquee ‘mega-projects’ as The Palm Jumeirah and The World, said the move was necessary as it sought to restructure $60 billion in debt. Sheikh Ahmed bin Saeed AlMaktoum – a leading member of Dubai’s ruling family – released a statement saying the move was ‘‘carefully planned’’ and claiming the fundamentals underpinning the multi-faceted company were strong.

‘‘We understand the concerns of the market and the creditors in particular. However, we had to intervene because of the need to take decisive action to address its particular debt burden,” he said.

But analysts said the development raised major questions about Dubai’s ability to weather the global recession. The fact that the Dubai World announcement came during the Eid al Adha Islamic holiday, when regional stock markets were closed, indicates that the Dubai authorities feared the news would further pummel already weak investor confidence.

Financial markets reflected this lack of confidence by pushing up the prices of credit default swaps – the cost of insurance against Dubai defaulting on its debt – and ratings agencies downgraded a number of companies with close ties to the Dubai government.

Dubai is believed to have debts of at least $80 billion, but analysts say it is difficult to get an exact figure because of lack of transparency and a labyrinthine corporate structure. The fact that a large percentage of the debt is owed to the Royal Bank of Scotland has also raised eyebrows and depressed stock markets in Asia and Europe, including Ireland.

Many analysts and observers thought Dubai had sufficient funds to cover debt repayments this year, after neighbouring Abu Dhabi bought $10 billion of Dubai bonds last February. That move was effectively a bailout for Dubai and must have proved extremely embarrassing for the fiercely independent Al-Maktoums, who will undoubtedly cede some prestige to Abu Dhabi as their financial predicament increases.

This imbroglio throws a harsh light on the ambitious plans of Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, whose pro-business stance and ‘can-do’ attitude earned the emirate the unofficial title of ‘Dubai Inc’ during the boom of the last decade.

Dubai is probably the best-known of the seven emirates that constitute the United Arab Emirates (UAE) – a federation of semi-autonomous sheikhdoms formed when Britain ceded control of a number of protectorates along the Persian Gulf region in 1971.

But unlike oil-rich Abu Dhabi, Dubai has few natural resources, and sought to diversify its economy by establishing itself as a luxury tourist destination and a logistical and financial hub. This development model called for rapidfire expansion fuelled by massive borrowing.

Despite its lack of petroleum reserves, Dubai benefited from the soaring price of oil in recent years – $147 per barrel in 2008 compared with $80 today – as it created vast excess liquidity in the neighbouring Gulf states, for which the emirate was a willing home.

Dubai’s massive Jebel Ali port also connected producers in Asia with consumers around the world. But as global recession reduces consumption and production, Dubai Inc is completely dependent on a turnaround in the global economy to rescue it from the crisis.

In the long term, Dubai’s best hope rests in its ability to differentiate itself from its surrounding political and ethnic mixes. None of these has Dubai’s reputation of a freewheeling entrepot where business is allowed to flourish – never mind the infrastructure or the mindset.

However, in the short term, the outlook is bleak. The emirate’s over-the-top construction industry was built on a tsunami of borrowed money which created a property bubble of staggering proportions. Even the planned opening of Burj Dubai – the world’s tallest building, at over 800 metres – next January carries an ominous portent.

Peter Cooper, a Dubai-based business journalist and entrepreneur who cashed in his chips at the top of the market, describes in his book Opportunity Dubai: Making a Fortune in the Middle East how even a notable achievement such as this could be a bitter pill.

‘‘The completion of tall buildings almost always marks the top of the business cycle. The Empire State Building was completed in New York in the early 1930s during the Great Depression, and remained half-empty for a decade.”