What’s going on in Dubai? The week BusinessWeek put Dubai on its cover, and subtitled, "Why It's No Mirage". On December 14, Dubai received a lifeline from its neighbor, Abu Dhabi. How did it get to the point where it needed a lifeline? In late November Dubai hit its limit: it had to reschedule payments on $26 billion of debt. BusinessWeek describes Dubai as “the most dynamic business hub in the Gulf” and “a model for its neighbors”.
Dubai is unusual in the region because it is not dependent on the energy economy and has a more open economy than its fellow emirates. It is true that Dubai must be more innovative than its neighbors; it does not have the oil and gas reserves and must find other ways to be an important economic player.
Dubai experienced a real estate boom not unlike the one in the United States. Rules were looser, prices went up and the cycle fed on itself. Dubai first let foreigners buy real estate in 2003 and the buyers streamed in.
Nakheel, a subsidiary of Dubai World, suffered the most in the economic downturn. It created the iconic palm island development seen in so many photos. Nakheel currently has approximately $21 billion in debt.
The problems in Dubai have been simmering under the surface for a while. The ruler of Dubai is Sheikh Mohammed bin Rashid Al Maktoum. Sheikh Mohammed likes to protect the image that everything is okay. But Dubai is still tightly ruled. Finances are not transparent. Apparently, no one really knew the debt picture.
In spite of this, Dubai is still tolerant of foreigners, does not tax income and has some fun amenities. Many multi-national companies have located in Dubai because of the “open culture, top-notch infrastructure and hassle-free business climate”.
Dubai is home to the Dubai International Financial Center, just a few years old. Why have the investment banks chosen to locate here? The emerging market for Islamic Financial Services, now about $1 trillion worldwide.
Companies native to Dubai are doing well also. There are real estate companies, ports and airlines. The leading private equity firm is Abraaj capital. Qatar also has a financial center. Abu Dhabi has a joint venture with GE and Saudi Arabia is trying to get into the game.
BusinessWeek says that the Emirates region has provided wealth but few jobs. This is an issue of concern because it is important to employ young people. BW reports that young people “risk being drawn toward Islamist extremism if they don’t get it (a better life)”.
Abu Dhabi is apparently the financier of the Emirates region, but Dubai is the business center. Dubai needs to strengthen its infrastructure and is having trouble lining up bank credit. Because of Dubai’s dependence on Abu Dhabi, it may become more conservative socially and politically and may not be so independent in its foreign policy. If Abu Dhabi has the funds for a bailout that means the region will gravitate toward Abu Dhabi.
What does the future hold for Dubai?
Many think Dubai will land on its feet and do just fine. Many of the excesses will be tamed. Development will slow down. Dubai needs to “tighten up regulations” and “improve governance” according to BW. A major part of Dubai’s role as a business leader is its openness to foreigners. Other countries in the region do not want foreigners. BW cites Singapore as an “inspiration” to Dubai. If that is the case, we’ll be seeing more of it in the future.
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