The fall of Dubai

Posted: November 30, 2009 in World's news

27 Nov 2009, Reuters

DUBAI (Reuters) – The “Dubai vision,” which has suffered a crushing blow from the freewheeling Gulf emirate’s sudden debt crisis, is the creation of one man who failed to apply the rules of open governance.

The city state’s rapid growth revolved around the ruler Sheikh Mohammed bin Rashid al-Maktoum, who outlined his ideas in a book, “My Vision,” where he suggested other Arab countries could replicate Dubai’s success. Now the model — always controversial among Gulf Arabs since it involved building shining cities in the desert at breakneck speed through the import of foreign residents, finance and labor — is on the ropes.

Questions will surface over what went wrong.

This week Dubai said it wanted to delay payment on billions of dollars of its total $80 billion debt, sending global markets plummeting as investors feared defaults could hit the global economy just as it was recovering from the financial crisis.

“Where next for the ruling family in Dubai?” said British historian Christopher Davidson. “The massive loss of legitimacy that the ruler is now facing, the massive loss of legitimacy that his son and crown prince face after lying to the World Economic Forum last week — where do these guys go from here?”

Sheikh Mohammed, whose face and words grace posters all over town, told the forum this month that the worst had passed for Dubai which was well-placed to pursue its development plans.

The news that investment vehicle Dubai World could not pay a $3.5 billion bond was released just before the Muslim Eid al-Adha holiday and UAE national day on December 2. Local media have almost entirely avoided comment on the debacle.

“Dubai could not be more transparent and open about the challenges it is facing due to the global economic downturn as it has been,” the English-language Gulf News said. The Arabic daily al-Khaleej praised the UAE’s investment climate.

There is uncertainty about what assets are owned personally by the ruling family, directly by the government or simply sponsored either by the ruler or the government.

So, the question next is, what will dubai do? Will it rectify mistakes quickly? 

It has 90US$ Bn debt, in which US$ 20 Bn will due next year..  If they decide not to honor debt, the consequences paid  might be bigger than that.. Dubai will lose its credibility and will be much more difficult in attracting foreign investment.. The country will suffer.. 

Their future will depends a lot on  how this country handle its debt negotiations over the next months.  Given its limited natural resources compare to  much stronger neighbour such as Abu Dhabi, Dubai government certainly can not just simply neglect international investor interest or prioritize its local lenders.

It will be interesting to see how the government act and hopefully, their action is for better than for worst..

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