5 Things You Should Know About the Dubai Debt Crisis

For 6 years, the Dubai Dream powered Dubai’s astounding growth, which manifested in extravagant displays of ostentatious living epitomized by infamous images of  gold-plated toilet flushes.

25th November doused this dream by officially hanging a big question mark on the sustainability of Dubai’s growth model when Dubai World requested a 6 months moratorium (delay) on its debt.

The announcement set off shock waves throughout financial markets with Dubai’s stock market leading the fall by declining 7.3% on 30 Nov and 5.6% on 1 Dec.

And now Dubai is on everyone’s lips again. So if you don’t want to miss out on the talk of the town, here are 5 things you should know about the Dubai Crisis:

1. Significance of Dubai World

Dubai World (DW) is just another company. So what? Well, DW is a giant state-owned conglomerate with interests in real estate, ports, tourism and the leisure industry. Well-connected to the ruling al-Maktoum family,  it has been instrumental to the excessive growth of Dubai’s global financial and business standing.

If even the giant can’t pay up, what about the other dwarves?

2. Size of Dubai’s Debt

Much of the grand-scale and capital-intensive construction projects were financed by huge levels of debt. The official figure is US$80bn but some analysts reckon the actual figure is closer to US$160bn (for reference: Singapore’s annual GDP for 2008 was US$182bn).

3. Global Impact

The ensuing debt crisis is not exclusive to Dubai and the UAE, for 2 reasons:

(i) Banks are the backbone of economies. Many of the creditors to Dubai are foreign banks. Their books now run the risk of potentially being written off due to non-performance.

(ii) Investors will most likely continue pursuing their flight to safety investment strategies, redirecting funds into US treasuries (still considered one of the safest instruments).

This implies a strengthening US dollar, which could put a dampener on their economic recovery since US exports will be more expensive.

And much as loyal supporters of Chindia would hate to admit, the world is not completely divorced from Uncle Sam.

4. End of the Dubai Dream?

According to Stratfor, there are two options for Dubai to avoid defaulting on its debt. First would be to negotiate with their creditors for new terms and time frames of repayment. Secondly, Dubai could ask its neighbour, Abu Dhabi, for bailout help. While the latter option is more effective, it would come at a political price with Abu Dhabi asking for economic and political concessions from Dubai. However, as the stability of the entire UAE region is at stake, it is unlikely that these demands will be unreasonable.

5.  Moral of the Story

Greed is not good. Extravagance is worse. Especially when it is funded by borrowed money.

If you want to show off that US$3000 Hermès scarf at your next high school reunion, make sure you do not have to resort to maximizing your 3x credit card limit nor paying for it in monthly installments of US$125 (or worse US$83.33).

 

---

 thangdynasty is a work-in-progress maintained by an accidental equity trader whose brief foray into the world of investments turned out… not so brief. Although unmotivated by the senseless pursuit of money in and for itself, she remains sadistically intrigued by the complex anatomy stealthily at work behind the whole spectrum of Markets – Fine Art, Financial, Fish and Fools. A budding art collector and supporter of emerging artists, she slogs to prevent collateral damage to her bank account resulting from occasional manic art buying sprees.

---