It is fair to say that Dubai’s fall from grace did not happen overnight. Over the last year or so, economists in the Europe and America had been predicting that the autonomous state would succumb but the worst was confirmed only on 25 November, when Dubai World asked for six-month grace period for their debts due in December this year. In the world of credit, this constitutes to a credit event and the creditors hold the right to decide if they will agree to the deadline extension or call for a default.
While the global economy slowly absorbs the full impact of Dubai’s downfall, it is perhaps important at this stage to attempt to identify what had gone wrong at Dubai.
Like many other economic downturns over history, an asset bubble burst was one of the main catalysts of the current crisis in Dubai.
Unlike in the States or the UK, a property price index was only developed for Dubai in early 2009 and it is difficult to quantify the magnitude of the initial property boom and its subsequent crash.
However, it is known that the property boom was largely driven by megaprojects. Ambitious projects like the Palm Islands, the World and the Burj Dubai were all commissioned between 2004 and 2005. Burj Dubai is expected to open in January next year, but works on the Palm Islands and the World appeared to have grinded to standstill.
In late 2008, Bloomberg began to run reports on the vulnerability of the Dubai property markets. Deutsche Bank estimated that property prices have fallen by over 50% since August 2008 and will continue to dip another 15% to 20% in the coming twelve months. Investors who bought properties in the last two or three years are definitely in negative equity now, with little hope of returning into the black in the near future.
The expansion of Dubai was largely driven by the influx of foreigners since the late 1990s. According to latest data, the population of 2.2million in Dubai was made up of nearly 83% non-nationals. Foreigners took up various jobs across various levels of the economy, from construction labourers and waiters to company CEOs and hotshot bankers.
Many of them were attracted to the Emirate because it offered an income tax-free environment and a relatively low cost of living.
Problems arose when the credit crunch hit Dubai. As construction projects slowed, large number of Indian and Pakistani labourers returned home. Other bankers, lawyers and accountants who were laid off by companies left almost immediately. These foreigners did not have kinship or any other sort of attachment to Dubai, hence could pack up and leave the city overnight.
The sudden departure of expats inevitably has a herding effect on those that remain. Businesses catering specifically to wealthy foreigners shut to avoid further losses, dampening the once renowned vibrant night life. The state of the economy hence suffers a downward spiral as people left the city in numbers.
Others have pointed out in retrospect that Dubai’s draconian law around failure to pay off debts is another reason for its eventual downfall.
Debt payment delay is a criminal offence, even for foreigners who work in the country. It is noted that one can go to prison even for a bounced cheque.
When times are good, very few take note of this particular law, since few are in debt to start with. When the times turn sour, people start delaying their repayments to credit card companies and reality hit them hard. There are expats in jail at the moment because of this.
This is contributing factor to why many foreigners leave it in such a rush. There are numerous reports on luxurious cars being left abandoned at airport car parks as expats literally flee Dubai as fast as they could. Most of them will not return ever again, as they face possible jail time once they set foot onto the country.
Pride comes before a fall. The most damning factor for Dubai’s demise in my humble opinion is the sense of invincibility which had surrounded the economy all this while.
From Dubai ruling family’s perspective, they wanted to expand Dubai at all cost. They were hungry for more wealth and status all the time. Through their various investment vehicles, Dubai made ambitious acquisitions globally. Their relentless pursuit of expansion meant that at times, they had made questionable investments, financed mainly by debt.
One of their most dubious investments was their US$5 billion stake in MGM Mirage, a casino and developer company based in Las Vegas, in 2007 (it is controversial as well because Muslims are forbidden to gamble). Barely two years on, the entire investment decimated in value as MGM struggled to deal with falling patronage to their chains of casinos because of the credit crunch. In March this year, Dubai World filed a lawsuit against the former owners of MGM when the latter started to report that they may not be a going concern.
For all other investors of the Dubai dream, they had foolishly believed that Dubai was too big to fail. They believed that no matter what happens, Abu Dhabi, Dubai’s richer and more influential brother, will step in to provide support. After all, Abu Dhabi holds 9% of the world’s oil reserve.
However, the relationship between the two states had never always been cordial. As recent as the 1940s, there had been armed conflicts between the pair. Abu Dhabi had never explicitly stated that it would provide financial support to Dubai – it was only assumed by most investors.
This misaligned optimism and a false sense of security had allowed Dubai World to chalk up US$60 billion worth of liabilities in the form of bonds issued, loans and other payables to various investors ranging from sovereign funds, hedge funds and multinational banking corporations.
The immediate impact of this piece of news was to send shockwaves across all major equity indices globally, although within a few days, most of them had rebounded after various reports assured investors that actual impact on the financials was not as grave as firstly thought.
What is to follow will be anyone’s guess. One thing for sure is that the Dubai dream is well and truly over. The Emirate has lost its status and reputable as a rock solid investment with infinite future opportunities. The state and any of its linked companies will find it difficult to acquire funding and loans cheaply in years to come and with that, the rate of expansion has to decelerate.
The bigger question now is – will any lessons be learnt from this?
While the global economy slowly absorbs the full impact of Dubai’s downfall, it is perhaps important at this stage to attempt to identify what had gone wrong at Dubai.
Like many other economic downturns over history, an asset bubble burst was one of the main catalysts of the current crisis in Dubai.
Unlike in the States or the UK, a property price index was only developed for Dubai in early 2009 and it is difficult to quantify the magnitude of the initial property boom and its subsequent crash.
However, it is known that the property boom was largely driven by megaprojects. Ambitious projects like the Palm Islands, the World and the Burj Dubai were all commissioned between 2004 and 2005. Burj Dubai is expected to open in January next year, but works on the Palm Islands and the World appeared to have grinded to standstill.
In late 2008, Bloomberg began to run reports on the vulnerability of the Dubai property markets. Deutsche Bank estimated that property prices have fallen by over 50% since August 2008 and will continue to dip another 15% to 20% in the coming twelve months. Investors who bought properties in the last two or three years are definitely in negative equity now, with little hope of returning into the black in the near future.
The expansion of Dubai was largely driven by the influx of foreigners since the late 1990s. According to latest data, the population of 2.2million in Dubai was made up of nearly 83% non-nationals. Foreigners took up various jobs across various levels of the economy, from construction labourers and waiters to company CEOs and hotshot bankers.
Many of them were attracted to the Emirate because it offered an income tax-free environment and a relatively low cost of living.
Problems arose when the credit crunch hit Dubai. As construction projects slowed, large number of Indian and Pakistani labourers returned home. Other bankers, lawyers and accountants who were laid off by companies left almost immediately. These foreigners did not have kinship or any other sort of attachment to Dubai, hence could pack up and leave the city overnight.
The sudden departure of expats inevitably has a herding effect on those that remain. Businesses catering specifically to wealthy foreigners shut to avoid further losses, dampening the once renowned vibrant night life. The state of the economy hence suffers a downward spiral as people left the city in numbers.
Others have pointed out in retrospect that Dubai’s draconian law around failure to pay off debts is another reason for its eventual downfall.
Debt payment delay is a criminal offence, even for foreigners who work in the country. It is noted that one can go to prison even for a bounced cheque.
When times are good, very few take note of this particular law, since few are in debt to start with. When the times turn sour, people start delaying their repayments to credit card companies and reality hit them hard. There are expats in jail at the moment because of this.
This is contributing factor to why many foreigners leave it in such a rush. There are numerous reports on luxurious cars being left abandoned at airport car parks as expats literally flee Dubai as fast as they could. Most of them will not return ever again, as they face possible jail time once they set foot onto the country.
Pride comes before a fall. The most damning factor for Dubai’s demise in my humble opinion is the sense of invincibility which had surrounded the economy all this while.
From Dubai ruling family’s perspective, they wanted to expand Dubai at all cost. They were hungry for more wealth and status all the time. Through their various investment vehicles, Dubai made ambitious acquisitions globally. Their relentless pursuit of expansion meant that at times, they had made questionable investments, financed mainly by debt.
One of their most dubious investments was their US$5 billion stake in MGM Mirage, a casino and developer company based in Las Vegas, in 2007 (it is controversial as well because Muslims are forbidden to gamble). Barely two years on, the entire investment decimated in value as MGM struggled to deal with falling patronage to their chains of casinos because of the credit crunch. In March this year, Dubai World filed a lawsuit against the former owners of MGM when the latter started to report that they may not be a going concern.
For all other investors of the Dubai dream, they had foolishly believed that Dubai was too big to fail. They believed that no matter what happens, Abu Dhabi, Dubai’s richer and more influential brother, will step in to provide support. After all, Abu Dhabi holds 9% of the world’s oil reserve.
However, the relationship between the two states had never always been cordial. As recent as the 1940s, there had been armed conflicts between the pair. Abu Dhabi had never explicitly stated that it would provide financial support to Dubai – it was only assumed by most investors.
This misaligned optimism and a false sense of security had allowed Dubai World to chalk up US$60 billion worth of liabilities in the form of bonds issued, loans and other payables to various investors ranging from sovereign funds, hedge funds and multinational banking corporations.
The immediate impact of this piece of news was to send shockwaves across all major equity indices globally, although within a few days, most of them had rebounded after various reports assured investors that actual impact on the financials was not as grave as firstly thought.
What is to follow will be anyone’s guess. One thing for sure is that the Dubai dream is well and truly over. The Emirate has lost its status and reputable as a rock solid investment with infinite future opportunities. The state and any of its linked companies will find it difficult to acquire funding and loans cheaply in years to come and with that, the rate of expansion has to decelerate.
The bigger question now is – will any lessons be learnt from this?
