The city of gold turns to dust

Dubai is a financial mess. Who’s to blame for the collapse?

by Anne Kingston

Only yesterday, it seems, Dubai was the glittering jewel of the United Arab Emirates, heralded as the first modern Arabian metropolis, a 21st-century socio-political model, globalization in action. Now the autocratic fiefdom that counts Barneys New York, the Travelodge chain, and a 20 per cent stake in Cirque du Soleil among its holdings boasts a new claim to fame: the most over-hyped, over-the-top asset bubble in history. This week, worldwide markets tumbled amid fresh fears of the global economic fallout from Dubai’s financial mess and the dawning realization that its finances are far more shadowy than ever imagined.

Certainly the government’s annoucement two weeks ago that it couldn’t meet its debt repayments was carefully calculated: it chose the eve of the market-closing U.S. Thanksgiving holiday and the four-day holiday marking Islam’s Eid al-Adha feast to report it had asked creditors for a six-month standstill, and was scrambling to restructure US$26 billion of its total debt of US$59 billion. Then, it announced that debts carried by its tangled web of state-owned companies, among them holding company Dubai World and property developer Nakheel, might not have government backing. Global markets panicked when the UAE, a federation of seven emirates led by oil-rich Abu Dhabi, didn’t rush to bail out its second largest member. Some equilibrium was restored when the UAE set up a lending facility to ensure Dubai’s banks had sufficient capital, and after Abu Dhabi announced it will selectively “pick and choose when and where” to alleviate Dubai’s financial woes.

Those woes should come as a surprise to no one. Christopher Davidson, a fellow of the Institute for Middle Eastern and Islamic Studies at Britain’s Durham University, predicted Dubai’s crash in his 2008 book Dubai: The Vulnerability of Success. “It’s amazing, really, the lack of due diligence done on Dubai in the last several years,” he says. Part of the problem, he notes, was Dubai’s confusing operating structure, which he says was deliberate. “The grey area between what belonged to the ruler, what belonged to government and what belongs to commercial entities served the ruling family extremely well: they could just cream off unknown amounts. Now the going gets tough and we have the ruling family and government washing their hands of these companies, making ludicrous statements that Dubai World is government-owned but doesn’t enjoy government guarantees.”

Dubai’s financial woes were also flagged in October 2008 by a Moody’s Investors Service report that state-owned companies owed at least US$47 billion, more than the emirate’s gross domestic product. Local media is censored, subject to severe fines for publishing anything that might damage Dubai’s reputation, but stories have been leaking out for a year about plummeting real estate values, abandoned projects and financial distress, most notably reports of the mass exodus of foreign white-collar workers who’d flocked to the city state during its go-go years, lured by a quality of life unavailable at home—tax-free salaries, luxurious housing, and cheap domestic labour. Thousands of cars have been abandoned outside Dubai’s airport, many with keys left in the ignition, some with maxed-out credit cards in the glove compartment. Under Dubai’s sharia law, punishment for owing money is severe. Residents can go to jail for bouncing a cheque.

Hence the spotlight on Dubai’s debt-mired leader, Sheik Mohammed Bin Rashid Al Maktoum, once viewed as a benevolent, luxury-loving despot who ran the emirate like a Fortune 500 company. It was his idea five years ago to turn the non-oil-producing emirate into a financial and tourist hub unlike anything the world had seen.

For a time he succeeded, creating a fantastical city state that was part Walt Disney, part Albert Speer, its phantasmagorical Blade Runner-esque skyline dotted by 25 per cent of the world’s crane supply. Billions flowed into the first “post 9/11” Arabic city, a hedonistic playground in the middle of Islam. One of its biggest cheerleaders was former U.S. president Bill Clinton, who called the place a “role model” for merging Islamic and Western values and cultures. In the years after 9/11, Dubai was embraced as a moderate Muslim country, says Davidson: “Neo-conservatives were willing to overlook its dictatorial government on the grounds that it promoted an alternative to political Islam.”

Also overlooked were the inhumane conditions inflicted on the hundreds of thousands of foreign workers, most from India and Pakistan, imported to construct the place to awe-inspiring effect. Nature was stage-managed at great expense, both financial and environmental: lush golf courses in the desert; a ski hill inside the world’s biggest shopping mall; sand rearranged on offshore islands that replicated a map of the world (with Israel notably absent). No expense was spared to bring celebrities to burnish the Dubai brand—among them Tiger Woods, Roger Federer, and Clinton. Dubai proposed a new oxymoronic economic model: state-owned capitalism. It was a trade-off: personal freedom for the promise of the best “quality of life on the planet,” like George Orwell’s 1984 with Gucci, McDonald’s, and a happy ending.

Easy credit allowed the Maktoum family’s private Dubai Holdings to go on a global spending spree. It snapped up marquee assets at market peaks—US$1 billion for a stake in DaimlerChrysler, US$1.5 billion for Tussauds Group wax museums, close to US$1 billion for Barneys New York, US$5.1 billion for a stake in the MGM Mirage, US$100 million for the Queen Elizabeth II liner, which it planned to convert into a floating hotel, as well as strategic ports around the globe.

Now the Dubai dream is kaput. “No big player can do business with Dubai now,” says Davidson. “The cost of insuring debt is too high to make it a legitimate business partner and that’s not likely to change.” People view it as a Dubai-centric problem, he says. “So I don’t think the rot will spread. Still, people will look at this and say, ‘How much more will unravel now?’ ”

That question could take years to answer. Respected analysts don’t trust government numbers. Last week, Moody’s upped Dubai’s estimated total debt to US$100 billion. EFG Hermes, a regional investment bank, thinks it could be as high as US$150 billion.

Next up on the Dubai debt calendar is Dubai World’s payment on a $3.5-billion Islamic bond held by Nakheel, due Nov. 14. A crunch creditors’ meeting is scheduled for Dec. 21. Rothschild Bank and Deloitte have been called in to help restructure Dubai World, with the directive to sell assets; this week, the finance minister announced the process would take more than six months. Dubai is angling to keep its profitable properties, among them DP World, the world’s third largest ports operator, and Dubal, Dubai’s aluminium company. State-owned Emirates Airline, the Middle East’s largest carrier, is also off the table—for now. Abu Dhabi, which owns competitor airline Etihad, is rumoured to have offered to buy it, only to be rebuffed. Should it succeed, the fallout could spill over into the aviation sector: between them, the two airlines have more than 400 aircraft on order from Boeing and Airbus; consolidation would result in both companies’ stocks taking a beating.

Up in the air too is Dubai’s Cirque du Soleil stake. Late last week, the Montreal-based company’s spokesman Tania Orméjuste said Dubai’s financial meltdown has had no impact. “Dubai World had already paid its investment,” she wrote in an email, after turning down an interview request. “Our operations as well as our business relationship with Dubai World doesn’t change.” This week, the government announced that the Cirque du Soleil stake was on the block, along with the QEII.

The UAE could have easily bailed out its profligate member, Davidson notes. The current jockeying between Abu Dhabi and Dubai is about politics, not economics, with Abu Dhabi using its financial leverage to reduce Dubai’s autonomy and close links to Iran by shutting out companies and creditors associated with that country. A regime change could be part of the plan as well, particularly given rumours that Dubai Holdings is also insolvent, says Davidson: “They’ve misled investors either wittingly or due to incompetence; neither is particularly palatable. The loss of legitimacy [to the UAE] is massive.”
Still, he doesn’t underestimate Dubai. It’s “a wily operator,” he observes, and its desire for autonomy could lead it to bailout discussions with Iran. “That is the nightmare scenario for Abu Dhabi and the other emirates,” he says. Saudi Arabia, also on poor terms with the UAE, could be another potential Dubai ally, he notes.

The first casualties of Dubai’s burst bubble range from the families in India and the Philippines who depended on money sent from workers, to European banks, among them Standard Chartered, HSBC Holdings, Barclays, and Royal Bank of Scotland, which are estimated to have loaned a total of US$50 billion. Jobs will be lost, Davidson predicts. Even racehorse markets have been affected: only two days after Dubai World asked for a stay on its debt repayment, Sheik Mohammed’s bloodstock adviser spent close to US$2 million buying eight foals. Last week, at mare sales in England, he was unusually frugal. “It’s the first time that anybody can remember that we didn’t see him buy anything,” one breeder told the Financial Times of London.

It may mean nothing. But given the confounding financial mirage that is Dubai, that could be the most ominous indicator yet.




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The city of gold turns to dust

  1. Just like Hitler who had grandiose dreams of building the new Germany, so too has megalomania and greed have played a significant part in this meltdown.

  2. I’m shocked that anyone could be surprised that Dubai is a fiscal basketcase. Anyone who is surprised deserved to be relieved of their cash.

  3. I was just in Dubai a few weeks ago. It was hit with the same financial crisis as the rest of the world.
    It will come out ok in the long run. By the way, I went to the Emirates Mall where the ski hill is, I’d still say the West Edmonton Mall is bigger. (And better).

  4. This article is so faulty, i think it is shameful that MacLeans would post something like this, and would use Davidson as its only source.

    The below is a list of things i found fault, and as a long time Canadian resident in the UAE, and being of Arab heritage, I think i can say that my analysis is indeed more accurate than that of Chris Davidson, who has suddenly jumped to popularity thanks to this crises and is using it to promote his name at every possible opportunity.

    Under Dubai's sharia law, punishment for owing money is severe. Residents can go to jail for bouncing a cheque <==== Its severe to punish those who are not responsible enough to respect their obligations? Its severe to expect someone to honour their committment, especially when it involves borrowing money? Oh by the way, for Macleans research department: Dubai does not use Sharia Law for financial cases

    Hence the spotlight on Dubai's debt-mired leader, Sheik Mohammed Bin Rashid Al Maktoum, once viewed as a benevolent, luxury-loving despot who ran the emirate like a Fortune 500 company. It was his idea five years ago to turn the non-oil-producing emirate into a financial and tourist hub unlike anything the world had seen. <==== Despot would mean that the citizens are against him. Anyone who lives in the UAE for more than 1 month realizes that he is very much loved by the people. And it was not his idea to turn Dubai into a tourist and financial hup; his father, Sh. Rashid Bin Saeed Al Maktoum, was the one who realized that Dubai had little oil and needs to diversify, so he began by digging up the creek, then built a new port and expanded the Airport, and the rest is history. This stuff is basic history, Macleans should have done its research before making the ridiculous claims above.

    (more points to follow)

  5. A regime change could be part of the plan as well <==== Anyone who has spent a few years here understands that the term 'regime change' is not a thinkable option. Al Maktoums have ruled Dubai for over 150 years, and while different branches of the family have taken over at times, its been the same family. Al Maktoum is part of the Bani Yas tribe, the same tribe that the Abu Dhabi rulers hail from. Only a naive person (ie: Davidson) would think that Abu Dhabi would put international finance ahead of its tribal allegiance.

    its desire for autonomy could lead it to bailout discussions with Iran <==== See above point. People tend to mistake Iranians in Dubai for Persians in Dubai. All of southern Iran (Al Ahwaz) is inhabited by Arabs, who come from the same tribes that live in the ARabian Peninsula. Those people may have come from Iran, but they are Arabs, and to assume that they will cooperate with Iran is not just naive, but plain stupid.

    Maclean, your reputation is on the line.

  6. Dubai was embraced as a moderate Muslim country, says Davidson: “Neo-conservatives were willing to overlook its dictatorial government on the grounds that it promoted an alternative to political Islam. <==== Dictatorial means that it is imposed against the citizens, and citizens are against it. That is not true; UAE locals have easier access to their rulers than Canadians have to their Prime Minister. The ruling families of the 7 emirates are very much loved and respected, and to call it 'dictatorial' is simply a representation of what a British person (Davidson) sees. Tribal democracy is understood by Arabs, not by a westerner. Imposing western values on non-westerners is not exactly the smartest thing to do, is it?

    Also overlooked were the inhumane conditions inflicted on the hundreds of thousands of foreign workers, most from India and Pakistan, imported to construct the place to awe-inspiring effect <==== What is inhumane is that the workers' governments do not tell them of their rights before they willingly and voluntarily leave their homes to come work in the UAE. THey do not tell them that there are laws against passport hoarding and non payment of salaries. Housing conditions may be 'inhumane' by western standards, but if someone does not wish to stay here, they can voluntarily leave, just as they voluntarily chose to come.

    Respected analysts don't trust government numbers <==== same respected analysts who never saw the financial crash happening? Same respected analysts who predicted that Dubai's success would last well into 2015? Same analysts who facilitated Dubai's loans without doing their due diligince? Ah yes, those are the respected analysts you speak of.

    (more points to follow)

  7. I endorse the general comments of Mike. This article is grossly superficial. It offers nothing new or serious. Dubai is strung out on debt and it has taken some risks, but also, many foreign investors flooded in to grab villas and apartments for only 5% down, and then cry foul when the international crisis hit the local area.
    Dubai is an oasis of tolerance in a rather intolerant region. It should be valued for its openess and resonably good transparency.
    Yesterday Nakheel started paying the suku.
    It will take a while, but Dubai will recover.

  8. Mike your argument is sad, every dictator that has ever existed has had people that love them and respect them otherwise they would never have got to where they. And the argument that "maybe inhumane by western standards" inhumane is inhumane and this proves you believe in the the arab notion that they are better than other's and "if they don't like it they can leave" attitude just tops it off. The whole article is wrong because Dubia didn't make these announcements last week and is going along superbly. Wake up why would creating islands that represent the globe not work, smacks of Queensland in the 80's, it's a basket case.

  9. Mikes argument is more superficial than the original article, yes the article perhaps uses language that's ambiguous and could have been worded differently but the the underlying arguments are still true. No the Sheik isn't a despot or a dictator & no he didn't start this race to revolutionise Dubai. Yes people should be punished for not living up to their debt obligations but I somehow don't see the Sheik seeing a day of jail time unlike many of it's residents. The simple facts are that Sheik Mohammed wilfully blurred the line between his fortune and ensured that these companies ran with little oversight and no transparency. These things however still may not have averted this crisis although it would have slowed down the momentum, much was simply down to timing. One couldn't imagine a worse possible time to try to build a city based on debt, without the credit crisis the bubble would still be expanding the the city may have been finished just in time to start repaying the debts. But the credit crisis did happen the brakes were not put on and Dubai is in trouble.
    The blame also doesn't lie just on the doorstep of Sheik Mohammed, the banks helped fuel this massive bubble and all economists know that bubbles are so easily burst. The greed of the speculators contributed too and will leave many in severe trouble.
    Despite the doom and gloom Dubai will not be allowed to go to the wall, when the dust settles and the debt restructured the assets dubai has bought and has built are still there and if there's one thing that we've learned from this it's that people….most notable economists & investors NEVER learn from their mistakes and are already looking for the next bubble!

  10. One thing that needs to be emphasized is that while Dubai World and its subsidaries are state-owned, investors should have been aware that their debts were private, not sovereign. Indeed, investors that bought bonds issued by these companies or shares in these companies should have noted that the fine print, stating that these were private businesses. The problem is that investors BELIEVED that the Dubai government, the ruling family or the UAE federal governmetn would back the companies if anything went wrong. AND these investors were right – in the end, Abu Dhabi stepped in to help Dubai out. Dubai will restructure and more money will come in.

    Another issue probably not captured by the article is that Western investors do not have a huge stake in these companies or in Dubai's market.

    Davidson is right on some of his views, but his analysis is a bit shallow. MacLeans should had interview other commentators to get a better assessment of the situation in Dubai.

  11. Wait, wait, wait.. this financial meltdown, it was all because of regulations put on to Fannie Mae and Freddie Mac right? That's what all those hard-core libertarians keep telling me. My goodnes, you mean to tell me that those regulations applied to Dubai as well? How terrible.. I didn't believe the US congress reached that far.

  12. It is such a gloomy picture of Dubai , does not seem realistic. I think the worst thing giving the writer so much grief is the fact that they had a world map that did not include Israel. Wow! ,time to cry again as if holocaust was not enough ! tears tears every where. It is such a shame that Israel is in love with the rest of the world and madly in love with the Arabs , but they do not seem to reciprocate that intense love. Oh God when will this world change and learn to hug Israel .
    I have no love for Dubai , and not much grief over its dramatic decline as writer has mentioned , Is it really so bad ? even worse than what has happened in US , there jobs were suddenly stolen by India and China and remaining ones taken by Mexicans ? It seems like the writer is exaggerating a bit , trying to make it some kind of Greek Tragedy . The demise of Dubai , and the writer is gloating over it .

  13. In Dubai…they built a mountain of debt up to the sky; & it came crashing down like a "Toy"!

  14. The Burj Dubai Just opened it's doors. It is by far the tallest and most magnificent edifice on our planet. Developed and designed for Emaar Properties of the United Arab Emirates by an "American" firm, Owings and Merrill LLP.
    It is an architectural wonder, an American feat that will stand as an iconic address for the oil rich Moslem states and as a target for the terror rich anti-American Jihadist groups.
    For Al-Qaida to down this $1.5 Billion structure, the way the Twin Towers (NYC) met their demise, would be a chilling coup. To instil fear in the hearts of Americans and pro-American states which is the raison d'etre of such terrorism. It would be an even more astounding event then the Twin Towers of 9/11. No worries for Dubai here.
    They believe that they must destroy anything associated with America and its democratic endeavours.
    Even the Burj Dubai which is a symbol of Arab prowess can become a symbol of American malice and aggression to the terrorist element.

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