A $10 billion bailout threatens Dubai’s status as Mideast money-hub
Dubai
Everyone thought the oil rich Middle East states would be unaffected by the economic disaster. But it seems that no country is immune. Dubai is in trouble and seeking help. But a $10 billion bailout from its neighbor, Abu Dhabi, comes with strings and is threatening to cost Dubai its autonomy and to neutralize the free-wheeling economic system that helped establish it as the Middle East’s main business hub.
About Dubai
Dubai is one of the seven emirates and the most populous city of the United Arab Emirates (UAE). It has a population of over a million people and a stunning economy with revenues from tourism, trade, real estate and financial services. Dubai is not an oil emirate and revenues from oil and gas contribute less than 6% of the multi-billion dollar economy. It also has a brutal climate, with temperatures sitting well over the 100 degree mark for most of the summer.
Dubai’s debt
It seems that the sheikhdom has accumulated $80 billion in debt mainly by building real-estate projects, including the world’s tallest building.
Abu Dhabi to the rescue
Abu Dhabi, which pumps more than 90 percent of the UAE’s oil and amassed one of the world’s largest sovereign-wealth funds, has long objected to its neighbor’s debt-fueled expansion, yet it has answered the call for help. But help comes with strings attached and a price tag. Before, Dubai was dependent on international banks. Now it’s dependent on Abu Dhabi.
The bailout, which is in the form of the Central Bank of the UAE’s $10 billion purchase of Dubai bonds, sparked the largest rally in Dubai shares in three months. Abu Dhabi is the richest of the UAE’s constituent emirates and effectively controls the central bank.
The oil slump
Dubai’s real-estate boom was fueled by low interest rates, petro-dollars and investment from international companies seeking to tap Persian Gulf wealth. Everything came to a halt last year as the price of oil fell to about $37 a barrel from about $90 a year earlier. Real-estate prices in Dubai fell 25 percent from their September peak as a result. The price of oil has plummeted and investors have dumped assets. Now the emirate is facing refinancing of $15 billion in maturing loans and bonds.
On the waterfront
An example of the crash of the economy in Dubai is a gigantic waterfront project which was expected to house 1.5 million people. The development company says it now only has funding for 700 villas, compared with the 10,000 originally planned.
How Dubai developed
Dubai built its role as a regional hub by creating special ‘restriction-free’ zones for financial services and media and by building dozens of luxury hotels, the biggest port in the Middle East and the world’s largest man-made islands. It also hosted leading tennis tournaments and organized high-profile golf and rugby championships as well as the Dubai World Cup, the world’s richest horse race.
Abu Dhabi, the neighbor
Abu Dhabi, whose sovereign-wealth fund had $328 billion in assets at the end of 2008, according to a study by economists at the Council on Foreign Relations in New York, may now move to buy stakes in Dubai companies controlled by the Sheikh ruler. Among them are ‘Emirates’, the major airline; Dubai’s international airport and the Jebel Ali port.
One commentator said, “Abu Dhabi looked at Dubai with a mixture of envy and contempt, a bit like old money usually thinks about nouveaux riches and their daredevil business approaches.
Those kinds of turns in regional politics are always unfortunate, and it sure doesn’t comfort citizens very much knowing that they have become dependent on their neighbors. Oh, and I must say cheers for mentioning the Dubai 7s! It’s great that there are export markets for the Game Played In Heaven. (Even if it is only 7s.)
Thank heavens for wealthy neighbours.