Dubai, the ‘city of gold,’ has to be careful with the dirhams

Dubai’s affluent suburb of Jumeirah 1 was once firmly connected to the mainland of the Arabian Peninsula. Now it is an island, separated from the landmass by the Dubai Water Canal that loops around from the Creek and pours into the Arabian Gulf.

It is a modern marvel and testimony to the ambitions of the emirate, which for many tourists and would-be Arab immigrants symbolizes the modern Middle East. A recent survey showed that the UAE is the place most Arabs want their country to be like. With respect to the other emirates of the federation, most of those aspirants would have the glittering shores of Dubai in mind.

The “city of gold” appears to recognize few limitations to its ambitions. The global financial crisis sparked an existential threat to its relentless expansion but so what? Dubai shrugged it off and got on with the plan — with a little help from its friends in Abu Dhabi.

That unstoppable growth appears to be continuing, indeed accelerating. The momentum given to Dubai by winning the Expo 2020 fair has sparked another huge round of ambitious projects. The emirate has ridden the fall in oil prices and is pressing ahead with an urban master plan as ambitious as anything in its previous 40-odd years of development.

For a while, it looked as if all the development was in the south of the city, toward Abu Dhabi. The expansion of Jebel Ali and its industrial zone was enhanced by the new Dubai World Central airport — which, when fully developed at an additional cost of $32 billion, is set to be the biggest in the world — and the huge desert site of the Expo, budgeted at $8.6 billion.

Then, as if to rebalance the city, big projects were announced at the northern end. The Dubai Creek Harbour project — another enormous waterside development, with a tower that would surpass Burj Khalifa as the tallest in the world — was announced, with a multibillion-dollar total cost. That was followed quickly by news of Dubai Maritime City, a $1 billion shipping, commercial and residential development at the northern end of the city.

Jumeirah Central, the first phase of which has been costed at almost $7 billion, brought the development activity back toward mid-town, while the Mall of the World — projected to be the biggest retail and leisure destination on the planet — pushed the growth eastward into the desert.

The latest to be announced was the $1.7 billion plan to build Marsa Al-Arab, with two manmade islands on either side of the iconic Burj Al-Arab hotel, continuing the strategy of adding to the emirate’s prime beach coastline, like the Palm Jumeirah and other ocean-side projects.

Costing all those developments is a complex affair. Some of the financial estimates above are for parts or phases of the projects; some include the cost of the urban infrastructure needed to service the projects — roads, causeways and utilities — while others do not. In any case, original estimates in these kind of project developments are notoriously unreliable. Costs tend to increase inexorably beyond initial budgets.

Nonetheless, it seems likely the emirate will have to find something like a minimum of $60 billion to finance these projects between now and 2022, when they are mostly due for completion. A big chunk of that is due sooner rather than later, by the time of the Expo in 2020.

These are mind-boggling amounts for an emirate the economic size of Dubai, representing rather more than half of its gross domestic product (GDP). Some of the cost of the Expo will be borne by the richer Abu Dhabi, and some — roads and utilities — are the direct responsibility of government. But most of the cost will fall on three main developers: Emaar, Meraas and Dubai Properties. The first is a listed company with a big government holding. The other two are directly government-owned.

Over the next few years, these will have to raise — in the form of equity, bonds or borrowing — many times their market capitalizations and balance sheets to fund new projects. Dubai has not in the past used equity to finance expansion and is unlikely to want to sell off large holdings in state companies. This route to cash raising can probably be ruled out, though the appetite might revive if the privatization program in neighboring Saudi Arabia is a conspicuous success. So can Dubai Inc. go to the banks and bond markets without again leading the emirate into a crisis like the 2009 crunch that nearly bankrupted it?

On balance, the answer is: Probably. Dubai entities, like the Investment Corporation of Dubai master fund, enjoy good credit ratings. The banks stood by Dubai in 2009 because they believed in the long-term strategy and can be expected to back it again. HSBC, for example, helped out as an adviser on a $3 billion tranche of borrowing for the airport expansion and others have also proved to be consistently willing lenders. 

But the margins for error are slim. The International Monetary Fund recently calculated that Dubai government and government-related debt stood at 112 percent of GDP. That is down from 126 percent the previous year but still big by any standards. There are some big maturities still to meet this year and next.

So Dubai should be careful with the dirhams. But that is not really what the “city of gold” is all about.

• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai