The Dubai development model has been seriously bruised and battered. It was predicated on a property play that turned into a bubble that burst. It was based on leverage aided by ample international liquidity during the heyday of the pre-financial crisis.
The aggressive building boom helped place Dubai on the world map. It should be no surprise to Dubai’s leaders that the world’s eyes are zooming onto them, since for many years Dubai lobbied the world for attention.
However, the Dubai corporate and decision-making elite have demonstrated a lack of transparency and candor during the past several days. They continue to deny the enormity of their city’s problems.
Analysts never publicly questioned the data produced by Dubai. All emerging markets present research challenges, and analysts often apply self-censorship. That said, the flow of data from Dubai was unusually one-sided and unchallenged.
Analysts who expressed doubts in private generally succumbed to pressure from colleagues in the profit centers of their respective institutions who didn’t want anything to disrupt the Dubai money machine.
Ratings companies likewise raised few red flags. With oil prices booming, and Dubai’s marketing superb, the outlook for international investors seemed opportune.
Money flow
Dubai also benefited from the shortcomings of the rest of the Gulf region, standing out as an attractive financial and transport hub with a friendly (maybe too friendly) open-borders policy. It attracted a lot of money from everyone, and no questions were asked about the sources of the cash. Be it Russian, Iranian, Kazakh, Uzbek or Pakistani, as long as the money poured in, few in Dubai — property developers, bankers or businessmen — raised eyebrows.
The corporate and political elite have sent word that the city-state is turning the corner and restructuring its debt. This step forward might not be enough to fix what appears to be a structural, decision-making predicament, not simply a debt problem.
Dubai needs to be more forthcoming, and more timely in the information it shares. Even if the authorities in Dubai had no intention to misguide or misinform, the timing of last week’s announcement suggested otherwise. Dubai World, the government investment company, chose the eve of the market-closing Thanksgiving holiday in the US, and the four-day holiday marking Eid Al-Adha feast, to disclose that it would delay repayment on much of its debt.
Dubai Inc.
The world doesn’t differentiate between so-called Dubai Inc. — the web of state-owned companies that includes Dubai World — and Dubai itself, since public-private ownership divisions are nebulous.
International creditors provided money based on the implicit backing of the private purse of Dubai’s ruler — Sheikh Mohammed Bin Rashid Al-Maktoum, the prime minister of United Arab Emirates — even if the fine print separated Dubai Inc. from the Dubai government. The government supported and appointed the executives, who are ultimately accountable to Sheikh Mohammed.
Few would disagree that profits from Dubai Inc. end up, at least in part, with the ruler or emirate of Dubai. By contrast, the profits of Saudi Basic Industries Corp., the petrochemical giant, are not shared with the king of Saudi Arabia, but with the shareholders of the company.
Implications for region
How Dubai chooses to handle this crisis could have implications for the greater Gulf region, whose nations have in the past ignored problems that could have been contained at the outset.
Similarly, how Abu Dhabi handles the Dubai crisis will affect investors’ views of the Gulf, at least for the short term. Global markets, more often than not, perceived that Abu Dhabi would act as a guarantor of last resort for Dubai, and that Abu Dhabi and Saudi Arabia are as good as the black gold they have underground. The leaders of the solid sovereigns — Saudi Arabia, Abu Dhabi and Qatar — did not exhibit excesses comparable to Dubai (though Qatar and Abu Dhabi showed some). That worked to their advantage during the global financial turmoil. The Gulf region was making its way out of the loss of confidence in corporate transparency, which affected everyone in the region, when Dubai’s problems came to light.
Flight to quality
For now, expect a flight to quality as global markets turn to Saudi Arabia, Qatar and Abu Dhabi. Dubai companies will be severely constrained for some time; ditto many Abu Dhabi ones, at least for the interim. United Arab Emirates banks, especially those based in Dubai, have a volatile road ahead due to their Dubai exposure. Further depreciation in Dubai’s property market, which many see as unavoidable, will hurt investors in Abu Dhabi and elsewhere. Corporations may be dissuaded from issuing bonds in the short term. A heightened sense of risk-aversion on the part of local and international banks could hinder growth, meaning fewer jobs generated for nationals and expatriates. There is a risk that global investors, troubled by Dubai’s problems, could downgrade the whole region.
Dubai as an economy isn’t finished. But the exuberance, leverage, arrogance and anything-goes attitude of the city-state isn’t sustainable. The mentality and personalities needed to settle Dubai’s problems are different from the ones that helped Dubai promote itself to the world. Now there is a need for a highly professional and competent team to manage Dubai’s debt predicament.
If Dubai continues to mislead global markets, international investors would say goodbye to Dubai.
(John Sfakianakis is chief economist at Banque Saudi Fransi-Credit Agricole Group, Riyadh. The opinions expressed are his own.)
