DUBAI DIDN'T FALTER IN ITS MISPLACED SELF-CONFIDENCE ALL THE WAY THROUGH THE GREAT GLOBAL FINANCIAL CRASH. AND THEN THE DAY OF RECKONING CAME FOR ITS YEARS OF FLASH AND EXCESS. NOBODY KNOWS WHAT IT REALLY OWES
Dubai seemed spared by the 2007-8 financial meltdown. Big projects proliferated and the emirate's sovereign wealth funds were seeking international banking stocks (1). At the height of the meltdown, in October 2008, Dubai announced the construction of an even taller building than Burj Dubai, then being built by Emaar Properties. This new Tower of Babel, over a kilometre high, was to be erected by construction giant Nakheel, on a 270-hectare site that would become "the heart of the new Dubai". The complex would cost $160bn, the tower $45bn.
Dubai offered a development model. It began with few assets other than its ports and its geographical position at the junction of Asia, Africa and the Middle East. It was small and with limited human and energy resources, but it has been preparing for years for the post-oil era. Like Hong Kong or Singapore, it never tried to promote democracy, only economic growth and free enterprise. The gigantic Jebel Ali port complex and its free zone, inaugurated in 1985, turned Dubai into the main regional entrepôt. Since then, the government focused on developing transport infrastructure – roads, ports and airports – as well as specialised zones such as the Dubai International Financial Centre, Internet City, Media City, Health Care City and Humanitarian City, where foreign companies could enjoy special privileges (2). It also opened the door to foreign workers (foreigners are now more than 90% of the population), and in sectors such as construction some are treated like serfs.
The emirate's governor is a true CEO. Mohammed Bin Rashid Al-Maktoum, who is also vice-president and prime minister of the United Arab Emirates, was a businessman, and has mastered the style and language of successful businessmen, appropriate for an emirate dominated by two major public corporations: Dubai World and the Investment Corporation of Dubai (ICD). "Sheikh Mo", indefatigable salesman of the Dubai brand, is the subject of business school case studies and is celebrated in business magazines, where he expounds his vision (3) – being world class in everything the emirate undertakes: "I want to be Number One in the world" (4).
When Harvard Business School's strategy guru Michael Porter was in the UAE in January to lecture on the competitiveness of the emirates, Sheikh Mo was seated in the first row, surrounded by members of his cabinet and 350 government officials. He's a fan of new media and social networks, and tweeted during the conference to his followers about what he was thinking (5).
The Dubai model has generated interest and admiration among opinion leaders. Thomas Friedman, the New York Times columnist, repeatedly exhorted the Arab world to follow Dubai's lead: "Dubaians are building a future based on butter not guns, private property not caprice, services more than oil, and globally competitive companies, not terror networks. Dubai is about nurturing Arab dignity through success not suicide. As a result, its people want to embrace the future, not blow it up" (6).
Outdoing the competition
Its model was widely imitated in neighbouring emirates such as Abu Dhabi, Bahrain and Qatar. These new rivals were offering free ports and sunny destinations, often more cheaply, plus cultural and educational initiatives. They also tried to attract the best museums and the most prestigious universities (7). This is how Dubai decided to one-up its new rivals. If other emirates were to be temples of shopping, leisure and spectacle, then gigantism and excess would distinguish Dubai. If other destinations had five star hotels, Dubai would build a seven star hotel. It embarked on the costliest and most extravagant projects, a programme for mentions in the Guinness Book of World Records. It would be defined by superlatives: the world's number one tourist destination, home to the world's largest shopping mall, the biggest aquarium, a ski resort in the middle of the desert, a refrigerated beach, a skyscraper in permanent rotation and the world's tallest building.
Other grandiose projects sought to astonish – regardless of human, ecological or financial costs: Dubailand, a theme park of theme parks twice as large as Disney World would reproduce the seven wonders of the world; Palm Islands – three complexes of beaches, houses and hotels – on islands arranged in a palm tree shape, would become the eighth wonder of the world. Other notable projects include The World, an archipelago of 300 artificial islands in the shape of a global map, to be followed by The Universe.
Was it overreach or megalomania? A speculative bubble was inflating, and government policies delayed its bursting. A marketing tool was to invite stars (like the footballer David Beckham and actor Brad Pitt) to buy vacation homes. Another was to offer permanent residence status to foreigners who would purchase homes. But these efforts faltered because of excessive supply and inadequate demand. Oil prices, which peaked at $147 a barrel in July 2008, fell by half after the global crisis. Demand for office space by foreign multinationals fell precipitously, and foreigners thought twice about second homes. Multinational companies that boosted staff numbers enormously during the boom cut their local staff drastically. Real estate prices began to collapse, and financial institutions, exposed to that market, had to reduce lending.
The year 2009 turned into an annus horribilis for Dubai. Although the government avoided talk of crisis, the public was no longer fooled: unfinished towers and half-empty buildings had replaced the familiar forest of cranes. On 14 January Nakheel announced that its giant tower project would be "delayed". Such statements, accompanied by job cuts, became commonplace. On 16 February the government quietly reported a merger between two sovereign wealth funds of the emirate, Dubai International Capital (DIC) and Dubai Group, and the sidelining of senior officials. On 22 February Abu Dhabi flew to the rescue by subscribing to Dubai 10bn of 20bn bond treasury bills issued by the emirate. This was to signal a return to normality.
But on 25 November, there was another shock: Dubai World – a conglomerate of ten companies including Nakheel and DP World, the world's third port operator – requested a six-month "standstill". The announcement was timed to coincide with the beginning of a long holiday break: Al Adha in the Muslim world and Thanksgiving in the US.
Markets were nonetheless jolted. For $3.5bn worth of Islamic bonds (sukuk) were soon to be redeemed. The risk of default by a state-owned company threatened another collapse of the world economy. Moody's, the ratings agency, downgraded other companies owned by the emirate, and the UAE Central Bank took measures to inject liquidity into the system and "reassure" investors. Dubai World strived to renegotiate its debt with about a hundred creditors and did major restructuring (8). On 30 November, Nakheel decided to suspend trading in all its listed bonds. The sukuk were different from other bonds in that they granted their holders ownership in underlying properties (9). Financial vultures arrived. Hedge funds bought debt on the cheap in the expectation that Abu Dhabi would eventually bail out Dubai World – or that future lawsuits against the government of Dubai would prove lucrative.
The episode highlights the opacity of the system. Dubai World is 100% owned by the emirate, which however does not guarantee its debt, estimated at $59bn. Nobody knows the size of the total public debt. Officially, the total indebtedness of Dubai is $80bn, but international banks suggest that the real figure is more than twice that. The emirate talks a great deal about governance but does not practise it.
On the morning of 14 December, the day the Nakheel sukuk were to be redeemed, Abu Dhabi announced that it would after all bail Dubai out by $10bn. Was this a loan or a gift? The statement did not specify. The money would be used to redeem the sukuk, and the remainder would be used to pay "creditors and contractors as well as meet interest expenses and company working capital through April 30, 2010 – providing the company was successful in negotiating a standstill as previously announced".
What political or commercial concessions did Abu Dhabi receive in return? We only know that at the official inauguration on 4 January 2010 of the tallest building in the world, previously known as Burj Dubai, it was renamed Burj Khalifa, after the governor of Abu Dhabi and president of UAE, Sheikh Khalifa Bin Zayed Al Nahyan.
(1) See Ibrahim Warde, "Sovereign wealth funds to the rescue: Are they saviours, predators or dupes?", Le Monde diplomatique, English edition, May 2008.
(2) Aamir Rehman, Dubai & Co: Global Strategies for Doing Business in the Gulf State, McGraw Hill, Colombus (Ohio), 2007.
(3) It is also the title of his book My Vision: Challenges in the Race for Excellence, Motivate Publishing, Dubai 2006 (in Arabic).
(4) See Ian Parker, "The Mirage", The New Yorker, New York, 17 October 2005.
(5) "Sheikh Mo" Twitter page
(6) Thomas Friedman, "Dubai and Dunces", the New York Times, 15 March 2006.
(7) Akram Belkaïd, "Fantasy cities for a future that might not come ", Le Monde diplomatique, English edition, August 2008.
(8) Robin Wigglesworth, Anousha Sakoui and Simeon Kerr, "Cost of Dubai default insurance rises sharply", The Financial Times, London, 15 February 2010.
(9) See Ibrahim Warde, Islamic Finance in the Global Economy, Edinburgh University Press, 2010. See also "Islamic finance", Le Monde diplomatique, English edition, September 2001.
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