Dubai, the once-gleaming playground of the rich, has become the latest victim of the global financial chaos. Its powerful investment arm, Dubai World, is close to bankruptcy, and its fate dependent on the largess of other Arab governments.
The emirate of Dubai is part of a federation of seven small monarchies that make up the United Arab Emirates (UAE). These grew rich on oil and gas dollars.
But unlike its neighbours, Dubai’s oil soon ran out. So its “visionary” ruler set out to turn the desert kingdom into the financial hub of the Middle East and a global financial player—with investments that include the giant Thames Gateway port in Britain.
Dubai World invested in huge building projects that transformed the kingdom into a shimmering capital for the global rich, with “seven-star” hotels and artificial island complexes.
It became the ultimate “gated community”, with a tax-free lifestyle and luxuries on demand.
But now the state-owned Dubai World can no longer pay its bills. This has brought a grim end to a long boom that many thought would never finish.
Global banks including HSBC, Barclays and RBS could lose over £30 billion. Billions more could be lost by global funds and small investors.
The latest crisis was triggered when Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, declared that the company would be suspending debt repayments worth some £35.8 billion.
Dubai owes its growth to the ever-present threat of war in the region.
In the late 1970s the emirate established a free trade port and set up
tax-free manufacturing zones. Factories and companies from Arab cities such as Cairo and Beirut decanted to Dubai.
A second wave of growth was driven by the flight of companies from Kuwait and Beirut—the traditional financial capitals of the Arab world—after the Gulf wars and Israeli invasions.
Dubai could stand aloof from these conflicts. It became a clearing house for Arab and global capital.
The boom, and high salaries, drew in skilled workers and professionals from across the region, including many women. Their remittances kept many of the smaller economies, such as Lebanon and Jordan, afloat.
But Dubai is built in the desert. It has no hinterland. The buildings were for the global rich, not locals.
They were constructed using cheap labour drawn mainly from across south Asia. These workers slaved in searing heat to complete the towers, hotels and luxury islands.
At first Dubai seemed to buck the global financial meltdown. But last year the banking crisis sucked out much of the new money that was driving its hike in property prices.
Many who bought property on credit now found their investments were worth a fraction of the original price.
On average property prices have dropped 50 percent since their peak last year, with forecasts of a further 20 percent drop.
The debts began to pile up. This in turn cut the flow of cash to the building firms, which began to default on payments to contractors.
Mortgage companies and insurance underwriters were swept up in the crisis. Global corporations followed suit. Many Western companies that promoted the “Dubai dream” sank.
The emirate began the arduous bailout process with the ruler pouring in some £20 billion in an emergency rescue plan. That injection of liquidity fuelled a slight recovery this year. But it was not enough to overcome the deep structural problems.
With his options running out, Dubai’s ruler Sheikh Mohammad turned cap in hand to oil and cash rich Abu Dhabi, Dubai’s historic rival.
Sheik Mohammed seemed to have pulled off an escape. Fear of a domino effect reassured investors that however deep the debt, the whole project would nor be allowed to sink into the sea. Abu Dhabi would ride to the rescue.
But then Abu Dhabi pulled the plug. As many of the wealthier Arab regimes had already been burnt by the banking crisis, it seemed prepared to allow Dubai World to take the pain.
It was a “Lehman Brothers moment”, when the ruling class gambled on allowing one part of the system to crash in order to shield others.
It is difficult to predict the course of this latest crisis. But the promise of the free market, which much of the region claimed was the only model of economic development, now stands as empty as the luxury towers that litter Dubai’s coast.