Dubai’s Disgrace

The Dubai debt crisis has underscored how fragile the global economic recovery is – and how jittery the markets are. It also demonstrates, as if we needed further evidence, how interconnected the world is. Governance and risk management problems in one corner of the world can have an impact on market confidence elsewhere. This column by Indian academic Ajay Shah originally published in Financial Express newspaper offers some insight into Dubai’s predicament. For an inside look at the emirate, you may wish to read this April 2009 report by Johann Hari, a commentator for The Independent newspaper in the UK.


11 Responses to “Dubai’s Disgrace”

  1. 1 Ryan Jacobs 02/12/2009 at 1:02 pm

    Although initialy stock markets were hit by the Dubai bust, they’re gaining ground agian as the news trickles down. I don’t think Dubai going bust is really going to affect the wider economy that much. It was known well before Dubai crashed that it was a black void, with a very risky property boom. I’m not saying that there aren’t risks of creditors becoming more worried with states like Greece or Britain, but these states weren’t trying to create an IFC. London already had one, and since Dubai is bust it’s likely Mideast investors will go back to London.

    The more likely issue is how this will affect investor confidence in other developing economies. If Dubai fell, who’s to say that investments in China may be on shakier ground than we all think?

  2. 2 Amy Lam Ka Man 02/12/2009 at 10:49 pm

    Dubai’s fall creates a confidence crisis. It’s not about how a developing nation would fail, but how all-government-initiated kind of nation-building would fail. After the financial tsunami, many countries, including US, UK, China these big economic players, relaxed their financial regulations, loan restrictions and initiated many construction projects to boost local economy. Although many experts are warning the too-loose fiscal policies would produce another financial bubble, people are too desperate enjoying the long-waited economic revival, crazily re-invest in stock and property markets and forget the lesson of financial tsunami.
    This Dubai’s fall highlights again how the world financial institutions and global financial markets are vulnerable to crisis under inter-connectedness of economies. Because the capital invested in one country had come from complicated and mixed funds from all over the world, increasingly no country can prevent citizens from investment loss. China and many Asian countries generally suffered less in financial tsunami because the financial markets are less connected to global financial markets. However, as China further opens up, and more QDII are allowed, eventually China cannot resist the fall when another financial crisis comes. To open up local markets is really a risky decision. The more open up it is, the less the nation can control its fate.

    • 3 Amy Lam Ka Man 02/12/2009 at 10:56 pm

      Oh I forgot to mention how shock I am as I read the article ”
      The dark side of Dubai”. Slaves do exist in this former-miracle land! And all investors were blinded by the shiny appearance of Dubai for 20 years. I just wonder why previously nobody could spot the hidden dangers. I just wonder why no journalist notice the existence of exploited construction slaves.

  3. 4 Wong Shuk Ting 03/12/2009 at 10:57 am

    Dubai was the “In Place” to own luxury property such as Palm Island for the “idle rich, footballers and pop stars etc during the boom period of buying property abroad.

    Much of it was purchased on borrowed money from the banks, again who thought the balloon would never burst and now some prices have halved as they were over inflated in the first place.

    Sadly speaking, it is obviously not a sustainable way of economic growth. It was all based on greed and status again but its been hit hard the same as other places. To a lesser degree you couldnt give away a Florida villa a year ago but there its picking up and Dubai is lagging behind and probably the last place one would expect to own up to debts as its aura is wealth and success.

    I do think the stockmarket over reacted somewhat but the world recovery is still fragile and any bit of news makes investors dump stock .

  4. 5 Chan King Fai, Tommy 04/12/2009 at 2:01 am

    Being an idiot in the area of economics and finance, I am not sure if the economic crisis in Dubai would create another global financial crisis to the world. I guess the global economy is yet to be recovered, that’s why I agree that perhaps people simply react in a very senstitive sense after the lesson learned in Lehman Brother. With the very interdependent relationship among countries of the world, I am sure a sight move of one nation will surely affect the others. Though it may not create a serious crisis, financial institutions around the globe should pay attention to what’s going on. It is unknown to the consequence if the recovering world is again hit by another financial crisis. Just hope that everything will be fine.

  5. 6 Tang Yin Hang Phoebe 04/12/2009 at 2:40 pm

    Dubai’s experience is an alarm to the developing countries that they must watch where they are going with the money they made. The financial crises in Dubai and US earlier this year proved that countries that base their living on luxury are bound to face high debts that are extremely difficult to clear. As these countries collapse one by one, other countries must make adjustments of their financial structure so that they do not base their prosperity and stability assets such as real estate, in which prices could collapse any moment.

    China as a whole especially needs to take this as a warning. The financial boom in the past 2 decades has seen a rise of middle class and even millionaires who buy houses all over the world and have a lot of vacations, buying luxurious goods, like the Dubai people do. If this continues, it is possible that this group of rich people in China follow the footsteps of Dubai citizens and become heavily in debt.

    This year the financial crises gave us a very clear view of how interconnected the world is. Confidence of investors all over the world is affected as soon as news of a big company in one country is collapsing, in this case Lehman Brothers and Dubai World. Investors withdraw money from the market quickly which leads to a sharp drop in the stock market. Only when there is hope for remedies can the market stabilize, but there are still many more hidden dangers coming, for example the US credit card debt. People now have to be very careful of where the money goes because it is increasingly prone to evaporation.

    I think instead of putting the debtors into jail the Dubai government should just change the law and introduce an income tax. It is no use to put the people in jail and feed them while they cannot work and make money to pay their debt. And it is a shock that the glamour of Dubai is actually built by slaves. It is hard to believe that such a country that advertise on its advancement builds its glory upon such inhumane practice. It is hoped that the collapse of Dubai will shed light for the slave workers because the buildings will no longer be built. The Sultan said Dubai is exporting hope, but that is not the case anymore. That hope is fading along with Dubai World that not everything in Dubai looks good to the world anymore.

  6. 7 Chiu Tsz Yin Rachel 04/12/2009 at 2:51 pm

    After looking at the article on Independent, i feel that the country is completely wasting all the precious resources for nothing. The dictatorship in Dubai simply does not allow the information to be known widely… and semi slavery will never be solved. Yet, shouldn’t the global communities do something about it? The definition of R2P perhaps is at a too high threshold, although we must be careful in striking a balance between the state autonomy and the right to interfere..
    I never used to see too much advertising on travelling to Dubai before but lately in mtr, i saw a lot of signboards on trips to Dubai.. should the in debt country still focus on tourism to pay off its debt meanwhile knowing that their hotels and facilities are actually detrimental to tourist’s health? The country is totally based on ‘lie’.

  7. 8 Susan Chan (2009932218) 04/12/2009 at 6:44 pm

    Once seemingly unstoppable, Dubai was a luxury oasis boasting indoor ski slopes, the world’s tallest tower, and manmade islands. It transformed itself into a regional financial hub; a place for tourists and foreign workers. However, Dubai’s debt problems have tarnishing a place built on borrowed money, and their problem is threatening to spill into other Gulf Arab nations. Events like this one brings back all the bad memories from the global financial crisis, in which the market is very sensitive to any bad news. People worry that there will be a contagion effect from Dubai, because announcements like these impact everybody in the region. The impact of this announcement will be that everyone in the area will be more negatively pereived, and investors will be more cautious about gambling with the welathy Gulf countries, who have oil wealth. In a report by the Huffington Post, Dubai World’s announcement on Friday that it needed at least a six-month delay in paying back its debt sent shock waves around the world. Asian markets tumbled for the second consecutive day, and oil prices dived to $74 per barrel. Even the U.S. was affected, with the Dow Jones industrials losing more than 150 points. It seems that the world endures the good and bad times together, due to the world getting more interconnected.

  8. 9 Ma On Ki 04/12/2009 at 8:28 pm

    I think the past success of Dubai is built on the its clear identity as an international financial center in middle east with a lot of appealing attractions e.g. the well-known Burj Al Arab. And its identity as to be a luxurious place attracts a lot of investment as with the beautiful environment, it can successfully attract the wealthy people to spend their time there. But one must not neglect its most appealing factor to the investors – the oil which is believed is able to support its development so the investors are not worrying about their investment. In light of this background, its economy is largely built on the foreign investment which exposes the weaknesses when the investors’ money are greatly reduced due to the financial tsunami and thus Dubai’s entire economy would be suffered.

    Its failure rooted in the inherent defect of the capitalistic global economy as its over reliance on foreign investment.

    I think the world bear the Dubai’s lesson in mind. A economy which is over relying on foreign investment is like a time bomb. What the government worldwide should do is to strike a balance between the development and the risk management. Though it is right to say that the world is so interdependent, when one of the big economies down, like US, the whole world will suffer, a responsible government should have some plans to mind to deal with that. As like China now, even the US is still suffering from the financial tsunami, China’s economy is still on a rise.

  9. 10 Kevin Chu 07/12/2009 at 1:03 am

    Dubai World, a major government-owned investment company which has total debts of $59bn is asking creditors to postpone its forthcoming payments until May next year. It is worried that Dubai World will default on its debt and affects the creditors and other emerging markets. Some commentators even draw analogy with the collapse of Lehman Brothers which triggers the global financial crisis in the fall of 2008. It is apparent that Dubai has structural economic problems, like the over-booming property market and heavy reliance on foreign investment as Ma On Ki suggested in the previous post. However, I am doubtful whether the postponing of such debt would have the effect of triggering another global financial crisis as the collapse of Lehman Brothers did.

    The significance of the collapse of Lehman Brothers was that it had triggered off the systemic risk. Systemic risk is defined as the risk that an event will trigger a loss of economic value of confidence in, and attendant increases in uncertainty about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy. The systemic risk is caused by the excessive borrowing, lending and investment among various financial sectors, like international banks, insurance companies and other mortgages taking companies. Their interconnectedness has been strengthened by the securitization of the assets and such assets are repackaged and sold to investors. Therefore, the collapse of Lehman Brothers would have a great impact on a large portion of the financial system.

    However, in the case of Dubai World, firstly, it has not defaulted on its debts but only announced a postponement of repayment by six months. It is not uncommon for the emerging markets and developing countries to have difficulties in repayment of their debts. There are established practices in dealing with this kind of credit risk, such as the creditor and the debtor will come up with Multiyear Restructuring Agreements where the creditor would grant a longer term of repayment with lower interest rate. The debtor could also offer to turn those debts into securities of local market and prohibit the creditor from selling it for a fixed period of time. It is likely that the creditors could at least get back a portion of its loans.

    Even if Dubai World really defaults on its debt, the contagion effect might not be catastrophic. For immediate effect, it is reported only a few large banks, like HSBC and RBS have advanced funds to Dubai. As aforementioned, they might probably have prepared for the possibility of default of these emerging countries in their risk assessment process. In addition, banks which channelled loans to these countries would also reserve a relatively large sum of money, compared to other loans, to avoid the default of the counterparty. For longer term, it is admitted that Dubai World has business interests in many countries including the UK, South Africa and across the Gulf, and has borrowed heavily to invest in new projects. However, Dubai is supported by the United Arabs Emirates and many of them are oil-producing countries. Therefore, the situation is not really so worrying as other commentators said.

    Related news article on Dubai’s postponement of repayment

  10. 11 Triston Xun Cui 08/12/2009 at 4:10 pm

    It really takes me a long time to read all article links and comments above. Sigh…
    Actually it seems that Dubai debt crisis has signals long time ago. In 2008, real estate prices in Dubai dropped 50% and all new construction has stopped. Now when the financial crisis has just passed, Dubai debt crisis seems to imply that still the uncertainty of global financial security exists.
    In latest Times magazine (December 14, 2009), it said that scholars still have debates on whether Dubai debt crisis will result in a new stage of global crisis, but admittedly, Dubai crisis rise a warning to all heavily indebted country. In this sense, I do not think that Dubai’s case will ever happen in China. Simply because Dubai had very limited reserves, while China has $2.3 trillion US dollar national reserves.
    However, still China should pay attention to Dubai’s case. Dubai’s crisis is due to the failure of state-owned enterprises who borrowed excessive loans from banks. These SOE, although efficient, seems not very rational sometimes while making decisions. In China, there are many SOE as well, as far as I know, many of them also borrowed huge amount of money from the bank every year but fail to return. Although those banks like Bank of China it self is a SOE as well, the unregulated loan may have devastate effect eventually.
    Moreover, what is ironic is that due to the restriction of press, while all the world is talking about Dubai debt crisis and put it on the headline, Dubai’s newspaper has no report on this. My friend who took Emirates Airline back to Hong Kong last week told me that, on Dubai’s own newspaper, the cover was that the Royal family celebrated a festival, while the news of debt crisis was only a short news in the corner of back page, saying “everything will be fine and there is nothing to worry about”.

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