Dubai sent shockwaves across the world when the news broke out that Dubai World, Dubai’s chief investment vehicle, wanted to defer its repayments on all or part of its $59 billion in debt. Dubai World alone is responsible for almost 75 percent of the entire debt of Dubai, which stands at $80 billion. Although post 25/11, when the news broke out for the first time, the ruler of Dubai did release an official statement comforting global investors (specifically on December 1, 2009 – the global financial markets stabilized a bit after that statement), but the world is still keenly looking forward to December 14, 2009, as that is the day when bonds worth $3.5 billion for Nakheel – the real estate arm under Dubai World and the company behind the prestigious palm shaped manmade islands – become due. A great deal of Dubai’s future and global investors’ fate would be determined on how the company deals with the bonds issue!
In fact, for getting the right perspective of what is happening to Dubai, one has to peep into Dubai’s recent history. Today’s crisis is not a result of any overnight occurrence, but has been something that has been brewing over the years. And the answer lies in the growth model which Dubai appropriated for itself almost a decade and a half back. The manner in which this particular emirate grew in the last one and a half decades, dwarfing all conventional growth models, is no secret! Long back, the rulers of Dubai – The Makhtoum family – realized that with depleting oil reserves, they had to find out an alternate development model which was different from the traditional petro-dollars model adopted by most economies in the Gulf region. So, for the past one-and-a-half decades, the focus was mainly towards transforming Dubai into a real estate heaven, and a financial and trading hub of the entire Gulf region. Initially, Dubai faced a lot of criticism with respect to its growth model (as it embraced Westernization) from the other nations in the Middle East region, including the other emirates of UAE; but gradually with time, it became the darling of investors. As Dubai stepped up on the construction-led growth and started showcasing to the world that something almost impossible could be achieved in a desert land, investors and investments started pouring in. In return, Dubai merrily kept riding upon cheap money that fl owed in from various parts of the world – particularly Europe and Middle East. Gradually, Dubai started suffering from the ‘est’ syndrome, which defied basic economics. Whether their markets needed it or not, everything they constructed had to be the tall‘est’, long‘est’, high‘est’, bigg‘est’ et al. So starting from the manmade biggest ice skating rink, to the tallest building in the world, to the biggest manmade islands, to the longest shopping malls – Dubai, in the name of grandiose and opulence, created everything that man had ever dreamt of. Such was the scale of the construction drive that it is estimated that almost 60 percent of global cranes were working in Dubai till sometime back! It was not that all investors were sold on the Dubai idea.
It was only those who got sold on the dream that Dubai created, and those who wanted to make a quick return on their investments, who were the ones who got drawn to this fairytale island. But then, there were certain sections of analysts who always found the Dubai market extremely intriguing. It is estimated that during the peak of investments flow into Dubai’s real estate, almost 30 percent of office area lay vacant on both sides of the Sheikh Zayed road – the central business district of Dubai. But still, Dubai kept on piling more space and raising old spaces to create new ones. And what was more asynchronous was the fact that real estate prices kept on spiraling northwards in the meanwhile. This was kind of strange as it meant that demand was being artificially created by restricting supplies of already built-up spaces. Thus, in their quest of creating a dream destination for investors, Dubai forgot two basic principles: First, in any market, artificially created imbalances cannot sustain for long (They can sustain till the time investments are flowing; and those too cheap ones). Secondly, that one day Dubai has to pay the pile of debt that it is creating and just in case something goes wrong, everything would go for a complete toss as Dubai does not have oil to fall back upon. Unfortunately, that’s what happened – a global recession tightened the flow of investments and gargantuan construction came to a grinding halt. Real estate prices came crashing down as there was no real demand to consume the created inventory (not to talk about projects under completion and the ones which were to take-off ). Dubai real estate prices have seen a correction of over 50% from their peak prices! Recoveries became impossible, pushing the economy to the brink of a crisis.
But then, for this impeding crisis, Dubai is not the only one at fault. The fact is that if Dubai is at any fault for this crisis, then every investor who tagged along is also at fault. What is incredible is the kind of double standard that is being exhibited by the global media towards Dubai. Till the time everyone made money, Dubai was the ‘Jewel of the Emirates’; and the moment the crisis dawned, it became the ‘Lehman of the Middle East’! Global media needs to realize and thank Dubai, for had Dubai World not made the announcement of deferring their repayments, the investors would have continued putting in their monies and gone into deeper crisis. They should also not forget that not long back, if there was a plausible investment destination for global investors post their adventures with the derivative world, it was this emirate only. They should also not forget that investors who had been investing till now have been getting their returns – probably this is one nation which has delivered the impossible and that too at a pace which has created new benchmarks in the real estate world. And they should also not forget that unlike Lehman, Dubai World is backed by the Dubai government. So to compare it with the former is an anomaly in itself! Lastly, if everybody wants to forget everything, they should not forget that whatever said and done, the world needs Dubai. Going by the evolving geo-politics of the Middle East region, Dubai is an imperative. It has been the only nation which could not only embrace westernization but also successfully neutralize the conservative Gulf culture to a large extent. Interestingly, over the past few years, even nations like Qatar and Saudi Arabia, who were extremely critical of the Dubai model initially, have started replicating the same in their own countries, though in their own conservative way!
And lastly, for all selfish reasons, we need Dubai for us. How much so ever Indian banks try and console each other, that there is nothing to worry as their exposure is negligible, how can there be no worry, knowing that Dubai has given employment to millions of Indians (Indians form almost 40% of Dubai’s current population)? How can there be no worries when we know that collectively, these Indians remit billions of dollars (Kerala alone receives over $10 billion from those Malayalis who are working in Dubai) back to India? How can one not worry knowing that the majority of South Indian households live a dignified livelihood only on account of the fact that someone in their family is out there, employed in Dubai?
And in all, if through all this, Dubai in its own way stood by the global investors and nations alike, today, then it is the latter’s chance to stand by Dubai!
- 03 December 2009 |
- Dr. Arindam on Indian Economy