Crisis in Dubai: A Local Perspective

As you have read and otherwise probably noted, I relocated my base of operations to Dubai last week. Days after I arrived, the emirate snatched global headlines as a number of companies owned by the emirate asked for a delay in payment deadlines on as much as US$60 billion in debt. The primary culprit is Dubai World, the emirate global investment vehicle, followed by its subsidiary Nakeel Properties, the developer responsible for such projects as the Palm. Dubai World accounts for almost three-quarters of the emirate’s public debt.

dubai palm

There are a few ways of looking at this.

On the one hand, this is one hazard of doing business in the Middle East. The global debt problem is only the tip of the iceberg. International creditors that follow global standards naturally fear a crisis the moment a debtor asks for a deadline to be extended. But this type of pleading for debt forgiveness is a common practice in the UAE and beyond, and have regularly occurred domestically over the past year. Many international construction contractors are owed payments on buildings and projects that have been completed, handed over, and under management and operation, which would not happen anywhere else in the world because contractors would exercise statutory or contractual rights to reserve transfer or operation of the project, or exercised a security to obtain repayment. Take the Dubai Metro. Opened to much fanfare several months ago, it was constructed by a consortium of construction and heavy industry contractors that have yet to be paid hundreds of millions of dollars that are many months overdue. But while some of the contractors involved are rumored to face bankruptcy unless they can secure payment, the business guys understand that this is part of the game — they have committed to continue work on new lines on the Dubai Metro.

On the other hand, while Dubai does have liquidity problems, many here believe the emirate has more cash than they let on, and could probably pay off a significant amout of debts — if they wanted. But even if a debtor has money, delaying debt payments is part of Arab culture, and Shariah law places strict limits on interest payments and calling for all debts to be forgiven after seven years. (The downside of this is, of course, that there is still debtor’s prison if a debtor can’t come to an agreement on an extension with creditors.)

On a related note, I was mightily unimpressed by the analysis of Robert Fisk, who’s loony Dubai analysis matches his performance in observing international affairs. I could give his entire article on Dubai a good fisking — but to just pick a few choice morsels in an article titled, “Robert Fisk: India may hold whip hand in this power game”, one section reads:

Dubai may soon find itself a satellite not of its Abu Dhabi capital but of India. The biggest merchants in Dubai are Indian – they run the gold market, even the bookshops in Sheikh Mohamed’s playpen – and west India is only two hours’ flying time away.

This lunatic claim ignores the fact that the shareholders of all local entities operated by Indian merchants (outside the freezones) must be 50+% owned by local Emirati interests, so Indians may operate businesses and even the gold market but they certainly don’t own it, and while Indians are important to Dubai and make up a plurality of the population, they certainly don’t dominate business. How you leap from Indians being involved in most minor commercial transactional activity to Indians being the lords and masters of the Emirate is even sillier than the many who fearmonger today that the United States is at the beck and call of Chinese bondholders.

Then comes this section:

As one fine source – Independent readers must take on trust how high up the ladder he is, but he should have known of this announcement and didn’t – said privately last night: “It came as a shock and a surprise to everybody, not only to me but to anyone I know. All the information I had till yesterday was that everything was in hand. We had the finding for everything coming due this year – there was the $10 billion [£6 million] issued back in February and then nearly $8 billion over the past month – the money’s there.

“So it’s a puzzle, particularly since it was very clear, to people who knew, that the bond coming due in December was a litmus test. Everyone was planning to repay it. The people of Abu Dhabi didn’t know this was going to happen. The market did not expect anything like this.”

Per my comment above, this is no surprise to me, and I’m new here. Someone in Dubai having money but choosing not to pay is part of the local commercial custom. Sure, it’s by no means accepted internationally. But if the Sheik/Dubai World thought they could get away with delaying payment, I’m not surpised they chose to do so. And anyone considering doing deals in the Middle East should probably keep this risk in mind when doing business here. And Fisk could have at least added this type of perspective in his article if he’s going to bring up that source’s quote and just leave it hanging there.

Moving on — how does the crisis impact daily life? Frankly, it’s barely noticable. The international debt issue has been kept out of the English newspapers (which are overwhelmingly local). The only sign of problems are seen on internet news and on CNN/BBC. Earlier this year, there was a mass exodus of people leaving the country as redundancies hit the emirate hard, but today, the only people remaining in Dubai who are openly concerned are those managing construction projects, as there are very few new projects in the pipeline. Otherwise, there remains very little crime in Dubai, traffic is bad but managable, prices have dropped considerably from highs in early 2008, including housing prices that have dropped, and will probably continue to drop as more projects come online.

About Curzon

Lord George Nathaniel Curzon (1859 - 1925) entered the British House of Commons as a Conservative MP in 1886, where he served as undersecretary of India and Foreign Affairs. He was appointed Viceroy of India at the turn of the 20th century where he delineated the North West Frontier Province, ordered a military expedition to Tibet, and unsuccessfully tried to partition the province of Bengal during his six-year tenure. Curzon served as Leader of the House of Lords in Prime Minister Lloyd George's War Cabinet and became Foreign Secretary in January 1919, where his most famous act was the drawing of the Curzon Line between a new Polish state and Russia. His publications include Russia in Central Asia (1889) and Persia and the Persian Question (1892). In real life, "Curzon" is a US citizen from the East Coast who has been a financial analyst, freelance translator, and university professor; he is currently on assignment in Tokyo.
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10 Responses to Crisis in Dubai: A Local Perspective

  1. kurt9 says:

    It seems to me that if you have any kind of business that requires a presence in the Middle East or any kind of trading business, now may be the time to go to Dubai. The bubble (meaning the fluff) is gone, and prices can now return to reasonable levels. This is much like Singapore after its crash in “02-03.

  2. Curzon says:

    Kurt9, yes — and everyone thinks there’s still plenty of room for prices to fall. Lots of new office and residential places are still scheduled to come online and rents have got to keep dropping.

    That being said, some things, such as transport, are dirt cheap — it’s $5 for me to commute 15 minutes by taxi, $0.80 if I walk and take the metro for 40 minutes. Food prices are very cheap if you stay away from fancy joints, a one person full meal rarely breaking $20, and you can buy a can of coke at standard Indian, Lebanese or Chinese restaurant for as cheap as $0.30 (no beer tho, unfortunately). Despite Islamic restrictions on public social behavior, you can enjoy the beach in a bikini or short shorts, buy alcohol and pork in designated locations, and women can drive and wear clothes that expose their knees and shoulders — making it a very easy place to live when you look thousands of miles in every direction.

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  4. Thomas says:

    Though, construction being a major indicator of future economic health, the fact that there are few projects ‘in the pipeline’ as you say may bode poorly for the health of the Eimirate.

  5. Evil Rocks says:

    This situation is eerily similar to that that Lord Cromer wrote about in Modern Egypt wherein he went to the aforementioned Oriental land in order to find a way to make Egypt profitable and so pay back her massive (15+ million pounds sterling at the time) debt. The Sultan of the Ottoman Empire stepped in eventually (nb: I’m only a third of the way through the book) but was restrained from doing anything more than haranguing the army for disobedience to the Sultan’s appointed ruler by the European advisors present (Cromer et. al.). It’s fascinating how middle-eastern countries ruled by oligarchies get themselves into uh-oh-big-trouble situations when Western loan sharks come a knockin’.

  6. Joe Jones says:

    Paul Krugman has a good blog post on the Dubai situation from a macro perspective.

  7. Mamahuhu says:

    See this?

    By the way, if anyone’s looking for a good book on Dubai, pick up Jim Krane’s Dubai: The Story of the World’s Fastest City.

  8. Curzon says:

    Thanks for that Joe. Hmmm. I agree with Krugman. Which is very rare. Dubai World’s reschedule of debt payments is not calamitous sovereign default, but just another real estate-inspired debt crisis, but this one has a lot more potential to be smoothed over than the sub-prime crisis because it’s much more limited and the revenue potentials are still there.

  9. Curzon says:

    Mamahuhu: Most construction workers do not work directly for Nakeel or Emaar or the other major Emirati master construction firms but instead work for contractors that may have obtained separate financing for their projects and will be paid when they finish the building and hand it over. So for that reason it seems unlikely that someone being fired now is a DIRECT victim of Dubai World, but could be a victim of a financer of the construction project on which he is working pulling the plug on the project.

    Construction is currently very active, which is better than half a year ago when most sites were silent. Accordingly, most of the layoffs have already happened. An Indian worker in Dubai being fired now is similar to a banker in London being fired now… both probably thought they had missed the redundancy slaughter of 2008-9, but unfortunately got slapped in the tail end of the crisis.

  10. Mamahuhu says:

    And such a nasty slap