It’s been an incredibly long time since I wrote anything, which I blame squarely on my workload instead of my laziness off course. However the events of last week in Dubai have renewed my interest in writing at least a little bit even if it’s just so I understand it myself clearly.
Dubai’s state owned investment company, Dubai World had to postpone repayment of part of its crushing $59 billion debt, including $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC. The Dubai World announcement came less than two hours after Abu Dhabi, the capital and wealthiest emirate in the U.A.E., bought $5 billion of Dubai bonds as part of a $20 billion support fund to help reorganize state companies.
Investors, journalist and the whole financial industry held its collective breath and braced for impact. Off course Dubai’s oil rich sister state Abu Dhabi and the rest of the UAE will not allow Dubai to fail. It’s just a matter of how many pounds of flesh the ruling house has to shed to make sure that their dream of a thousand and one nights will stay alive.
However, will this work in the long term? Whenever I’m in Dubai I’m always amazed by the scale of the real estate projects. There seem to be more shopping malls than people and at one time the largest part of the world supply of construction cranes could be found in Dubai.
The problem with shopping malls though is that you need shops and that means shoppers. The thing is that there doesn’t seem to be a lot of incentives for locals or tourists to shop in the cavernous Mall of the Emirates or the gigantic Dubai Mall. The local population is so rich that they rather fly to Paris or London to do some real shopping which leave the tourists. The price of electronic goods and clothing, two things tourists shop most for, isn’t much lower than in any comparable Western shop. D&B, Gucci and friends can be bought for less in Amsterdam. Sony, Samsung et all can be had for less in the malls of Hong Kong or even Singapore.
So if it isn't the shopping, what will attract tourists? Culture? Unlike Abu Dhabi, which agreed to pay France $1.3 billion to borrow the Louvre's name and hundreds of its artworks, as well as treasures from the Picasso Museum, Pompidou Center, Chateau de Versailles and other French museums, Dubai borrowed even more money to build Dubailand amusement park. Apart from the small but interesting local museum, there’s not much else to do. Dubai is notorious when it comes to nightlife but I doubt that the authorities really want that kind of image for their Islamic state.
A lot of people think that Dubai is oil rich, just because it lies in the Middle East. This is not so. Abu Dhabi has enough oil to guarantee revenue in years to come but Dubai saw the need to diversify years ago and borrowed heavily against its real estate assets. Doesn’t it sound familiar? Someone who borrows money against his house to afford a lavish lifestyle? It’s the mortgage crisis on a country wide scale!
Let’s have a look at Dubai’s current financial position. It has always been a well kept secret but the debt crisis forced the Dubai Executive Council to give a little insight:
Sovereign debt: $10.000.000.000
State-affiliated debt: $70.000.000.000
Sovereign assets: $90.000.000.000
State-affiliated companies assets: $260.000.000.000
This means that the total debt of 80 billion is covered by 1.3 trillion in assets. How many of these assets need to be written down to more realistic values if the Dubai real estate market continues like it is? Most of Dubai’s prestigious projects were conceived on the basis of making a quick buck. When stripped from all their glamorous hype, the Palm and World islands are just sandbanks with buildings on them. Sure it’s nice to have Brangelina as your neighbors but who would want to live on a sandbank?
Now that foreigners are fleeing the country to avoid debtors prison (yes there is such a thing in Dubai), the glitterati must really consider if they want to be associated with this less than glamorous reality. No celebs means no wannabes that are willing to pay the big bucks and that means re-evaluating real estate (yet again).
Again, this should sound eerily familiar. If Dubai can’t refinance, it will have to sell and if the assets values are going down, friendly uncle Abu won’t be around forever for the bail out.
That leaves the regular options that any sovereign state has at its disposal. Argentina and Russia, two states that hovered at the same brink of financial destruction restructured and raised their taxes. Both countries have a sizable domestic workforce and enough GDP based on tangible production. The issue with Dubai is that it has neither. The local workforce is largely comprised of imported construction workers, domestic personnel and white collar expats. Tax is negligible and for the domestic population, most public amenities are free. The real estate boom ground to a halt even before the Dubai debacle hit. Dubai’s best bet for the future would be modest spending habits combined with leverage of its central position between the East, the West and Africa. Expanding Dubai’s role as importer/exporter with excellent port and airport facilities could start the revenue engine again. Financial and political transparency is crucial if the image of the desert state as an overspending family owned business is to be changed. Time to sell the Ferrari and pawn the bling bling. If not, Dubai World will be only the beginning of the bursting bubble.
