It is only when the tide goes out that you find out whose artificial islands are built on sand. Dubai, the glitzy debt-fuelled emirate famous for its its extravagant sky-scrapers and man-made lagoons
Once a desert and now a concrete jungle, from the acme of the world economic roar to the precipice of bankruptcy, what has gone erroneous in the so-called glittering state in the desert?
They say climates during different periods of the year remains the same, so in property market, the prices of property. But the logic behind these statements is unsound, or once again reiterates that future is uncertain and nothing can be taken for granted. As the common saying goes, what goes up has to come down eventually, no matter what anyone says. That is the way how this world moves around. Nothing is certain.
Coming to the main picture, where is the glittering, charismatic, charming and enigmatic city of UAE? Dubai had its run in my opinion, but still nothing can be counted out. The essence of moral governance is what the need of the hour is.
Over the past few years or so, I have been trying to make people understand that, nothing is permanent and everything is just having its fancy run and if people exploit it more than its limit, the effect would be disastrous especially in property and stock markets. It felt, like my opinions used to always fall on deaf ears or people used to consider that what does this fellow knows when he has no experience. Fast forward, 3 years later to 2008 January, I again remind people, don’t ride your luck, because the fundamentals of the markets are completely wrong, and warn them, liquidate your position and move out from the market. Again, it fell on deaf ears. I tried; again, briskly for another 2-3 months even after Bear Stearns collapse, no one listens. I resign in educating them, as it was always like talking to a stone. September they get the message which was theoretical till now in reality and they start realizing what I had been advising them and how they had plugged their ears to some simple advice.
The world was in a panic, and people started to worry and pessimistic outlook was the picture was next2-3 months. But then, the governments and media round the world, started to portray a positive picture that economies are improving and infatuate the performance of companies who have done good to raise investor confidence.
During all this time, a group of its own, or a continent in a sense was performing average. Yes, I am talking about the Gulf or the Arab world which was safe on its shore which was not affected by any of these. People used to say, the gulf, was insulated from all of these global effects. But boy, where they wrong. Tried to again provide the reality and outlook, the effect the gulf would have, but no one cared to listen. Following are some of the outlook given by me which still stands tall and sound
1. The Arab region can live on its oil wealth for a long time and can have steady source of income as long as the world cannot find an efficient and cheaper alternative source of energy. Having said, that, where did the Arabs invest their surplus wealth? It was invested mainly in US and UK markets and some in other European markets.
2. Not all regions in gulf are blessed with abundant oil reserves. Some of them, are service oriented economies and they are always directly proportional to mood of the global economy i.e.; if people are pessimistic, the service economies will get hampered badly and if people are optimistic vice versa
3. Never will the property market stay high or over inflated, because natural correction will take place if people don’t take the necessary measures. The rope can cut off any moment on its own if it inflates more than imaginative numbers. Most of the Arab regions development in terms of property and infrastructure is on loans round the world. They should have been sensible enough to use their cash assets especially when they are service based economies. The global downturn left many financial workers unemployed. The population fell an estimated 17%, meaning there was little demand for new properties.
4. Money always causes trouble. The more you get, even more you want. People don’t know where to invest, who to ask advice and so on. This is where everything started to go wrong. You start taking expert consultants and their services and listen to them to invest in derivatives, CDO, ABS etc... which even they don’t have any idea and you end up losing more
5. No backup plan for serviced oriented economies if something goes wrong.
It’s not always necessary that whatever has been said is always right. But then, why would one not want to look at the other side of the coin before basing decisions?
Fast forward and today we are talking of one of the most glamorous city Dubai, which is like the New York of USA, London of UK and so on... Dubai has become a victim of its own financial mismanagement and lack of proper policies and check points in place. How can the administrators miss the fact that, the economy has 140 % of debt of its GDP? This is preposterously very high. During the boom, the government of Dubai and its enterprises ran up at least $80bn of debt obligations. This may be a lot of money for a small country, but it pales in comparison to Lehman Brothers’ $613bn of liabilities. Dubai is a big property developer and a heavily indebted government, but a small financial player. Still, this little pebble in the Gulf created big waves in markets
Mistake
The Emirate evidently expanded too fast and ran up heavy debts by embarking on vanity projects of doubtful financial viability, such as the 810 meter-high Burj Dubai skyscraper — the highest in the world — and the artificial islands built in the shallow waters along its coast, to provide room for miles of luxury villas. These, in particular, could be vulnerable to a rise in sea-levels due to global warming. In view of the hot and humid climate in the Gulf, Dubai’s emphasis on high-class tourism may prove to be a mistake.
There was also less demand for luxury holidays. Dubai companies have borrowed money to fund huge building projects such as "The World" and are now unable to repay it. There are jitters on financial markets about who lent all the money. European banks are estimated to have lent more than £50bn to the whole of the United Arab Emirates
Dubai does not have the enormous oil wealth enjoyed by its neighbours such as Abu Dhabi. Its main source of wealth has historically been as a port.
Its real advantage, however, lie in its location — as an international trading and financial hub between East and West — and in the quality of the people who have chosen to live and work there. These assets are bound to see it through.
I have read and heard from different sections that Dubai has traditionally had close trading ties with Iran, a short distance away across the Gulf. Entrepot trade has been worth billions of dollars a year. But American pressure on international banks to deny credit to Iran has hampered this trade, and has no doubt been a factor, if a minor one, in the triggering the present financial crisis. A resolution of the West’s quarrel with Iran could be to Dubai’s great advantage.
In recent years it has sought to make money from property development and luxury tourism, building impressive hotels such as the Burj al-Arab.
There was also less demand for luxury holidays. Dubai companies have borrowed money to fund huge building projects such as "The World" and are now unable to repay it.
There are jitters on financial markets about who lent all the money. European banks are estimated to have lent more than £50bn to the whole of the United Arab Emirates.
Dubai state-backed companies may also have to sell-off some of their assets overseas such as luxury property in London and the Turnberry golf course in Scotland.
Way ahead
It is always difficult and confusing to decide the road map for any country when it’s fundamentally rocked from its foundation. We should remember that the economic crisis which unfolded in 2008 was caused by a build-up of leverage. As the crisis unfurled, policymakers rescued debt holders, rightly betting that the best escape route was to meet obligations to creditors and then rely on future economic growth to make debts manageable.
As a result, the financial system remains over-leveraged and undercapitalized. Growth may be returning and green shoots breaking through, but this week has confirmed that the world is not yet in the clear. The financial system remains fragile. Losses and clouds of uncertainty, such as those now hanging over the Gulf, can still trigger skittish sell-offs.
Markets will not soon or necessarily return to the panic of September 2008: the financial sector now has state backstops. But, because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland, in particular because they are also service based economies.
But one should not think that panic of September 2008 not to repeat as Thousands of migrant workers, mostly from South Asia, are already stranded in the emirate, and there are likely to be more over the coming weeks as more companies cease their operations or face cutbacks.
These men will have difficulty returning home and the flow of money to their home would start to dry up and the world will start to see a credit crunch and the economy would be pushed back to the deflationary mode especially in terms of spending by consumers which will impact the world because the world economy is inter-related and inter-dependent.
One should not, however, be overly pessimistic. In my view at least, the world has been far too quick to suggest that the glossy city-state is about to go bankrupt. This is far too gloomy a prediction. Dubai will undoubtedly weather the storm because it has many assets in many parts of the world, some of which can be swiftly monetized such as luxury property in London and the Turnberry golf course in Scotland and Abu-Dhabi is the last spring of help, but if this does not materialize, I guess we would have to confine the stories of Dubai to the textbooks.
There is always a good side to crises such as these. They force decision-makers to pause and take breath, and to reflect on the sort of societies they wish to build because in a sense, Dubai has been sailing on the wrong path.
