The Seismic Activities of Dubai-Property-Bubble and Inevitable Consequences
Financial markets across the globe almost took a nose dive quite unexpectedly on Thursday, as the gloomy news from Dubai, the desert kingdom on a concrete footing, drifted westwards while developing itself into fiscal hurricane of category 3, offshore.
The appeal made by Dubai World, the government construction company which is behind numerous ambitious development projects in the Emirate, in seeking delay in debt repayments on $3.5 billion – out of staggering $60 billion debt – was quickly interpreted by the analysts as an attempt to default on the city state’s loans and panic swept through the global market faster than the investors can memorize the Emir of Dubai - Sheikh Mohammed bin Rashid al-Maktoum.
The financial position of Dubai World and its real state subsidiary, Nakheel, seems to be precarious enough for respected analysts to treat the apex of the unfinished tallest skyscraper in the world, as the tip of a very big iceberg indeed; the reportedly-abandoned luxury cars at apartments and the airport by fleeing investors do not make the battered landscape any spectacular at the hour of need.
“What’s going on?” I asked my man who lives in a luxury apartment in the city with a very powerful laptop. “Only God knows,” says him while firing all faith barrels before breathing a prolonged sigh – but not of relief, unfortunately. A cocktail of uncertainty on a land where alcohol is not promoted can trigger off more than a single bout of depression.
The Emir of Dubai did of course, have a vision - or most probably a dream, - to turn the tiny city state into a vibrant financial hub in the volatile Middle East, perhaps on the scale of Singapore or Hong Kong. The phenomenal construction boom that generated skyscrapers, luxury apartments, hotels, offshore islands and even golf courses, has been a force of destruction in disguise too, as the extra layer of debt- mountain is exposed beneath the pillars of concrete on the desert sand – well below the beautifully impressive land marks.
Dubai was not immune to the first phase of the recession that the world is in now. The folks who invested in property sector saw the value plummeting, by as much as 50%. I met an Indian about three months ago in a function in London who owns eighteen flats in Dubai, yet being unable to rent out a single one. So, the ‘prophesy’ of defaulting on debt was not a bolt from the blue; people knew it was coming.
The fiscal hurricane of Dubai whirled around the British Isles much more than it did around other European states. The reason is pretty simple: Two British banks have been exposed to the crisis in a significant way so that the matter is not something to be swept under carpet, especially at a time, some of the big names had been bailed out by the British taxpayers. The loans handed down to appease the property hunger run into billions. Making matters worse, the ruling elite of Dubai own quite a few landmark properties in London. The health of them, in the light of latest developments, is anybody’s guess.
The impact on the developing world is even more disturbing. On one hand, Dubai has been an employment treasure island for Asians and Africans for decades. On the other hand, these countries export lots of goods to the country to bolster their own export trends. The collapse of either can affect millions of Asians and Africans – directly or indirectly.
Dubai, one of the seven emirates of United Arab Emirates, is not as lucky as its brotherly neighbour, Abu Dhabi, in terms of possessing Black Gold. In this context, the Emir was right to think long term for a rainy day when the oil appears to be running out in his life time. Unfortunately, both the scale and pace of achieving that dream seem to have let him down. His attempt to calm the fears about lingering debt issue this week may be an indication that there is a problem to be seriously addressed.
Dubai has turned to its oil-rich sibling, Abu Dhabi, in seeking help; Abu Dhabi has helped Dubai before. However, further help seems to be coming only on case-by-case basis. Abu Dhabi did not emulate Dubai – at least, building for building – while remaining a conservative Islamic state at the core; its approach to market-based enterprise has been very cautious.
When a bubble is subjected to a rapid expansion, the spectre within it, is always breathtakingly beautiful. Its fiscal, financial, property or dot.com equivalent is no different. Only when it bursts, do the spectators realize the kaleidoscope could be a very expensive mirage in the making. The folks who scratch their heads or turn the back on the tiny gulf state learn through bitter experience that going with the flow is only ideal as long as the flow doesn’t stagnate somewhere.
- Asian Tribune -