Dubai is looking something like Rocky Balboa late in his first fight with Apollo…bruised, battered, struggling to his feet– but still fighting. Of course, if you remember the movie, Rocky didn’t win that fight. He was all heart, no belt. I think the analogy fits.
To be clear, I think Dubai is great… I have done a lot of business there and I enjoy it; it’s fun, safe, diverse, historic, and cosmopolitan. For the right expat, namely internationalists and expeditioners, it is a worthy location… as long as you don’t mind abiding by a few cultural guidelines.
Dubai is one of seven emirates that collectively make up the United Arab Emirates. Each is semi-autonomous– the UAE federal government handles things like the postal system, air traffic control, national immigration issues, foreign affairs, national defense, etc.
All other powers not expressly granted to the federal government are reserved for the individual emirates. Come to think of it, I think I read a similar clause to this once in the US Constitution. Oh well, at least someone is getting some use from it.
Out of the seven emirates, the two that count are Dubai, for its glitzy showmanship, and Abu Dhabi for being the money man.
As for the other ones… well, Sharjah is a fairly important port location, Ajman is where they tried to sell overpriced real estate using Stephen Baldwin as their celebrity poster boy, and the other three emirates don’t even try to get noticed.
The reason for the inequality is a matter of resource rights; Abu Dhabi has the most productive real estate, therefore it gets the majority of the resource wealth. And for most of the last several decades, Abu Dhabi has been patiently saving its money and waiting.
Dubai, on the other hand, took the relative chump change from its own resource wealth and began investing heavily around the turn of the century. The goal was to attract foreign businesses and professionals to create sustainable industries in technology, finance, media, health care, education, and just about everything else you can think of.
Each of these industries became subsidized by the government in some capacity in order to provide foreign companies with a strong incentive. Zero taxes and lax labor laws certainly helped.
Then the government, through quasi-state owned construction companies, started ‘master planning’ by building huge, self-contained mini-cities specifically for each industry– “Internet City”, “Media City”, “Academic City.” Each was designed to have a full suite of commercial, residential, retail, and recreational space.
Initial demand was strong, and for the first few years it looked like the plan was working. By 2006, Dubai was the IT place, and people from all over the world were flocking there to live, work, and invest. It was during this time that the world bubble economy was starting to peak, and Dubai would not be immune.
When the bubble burst, much of Dubai’s financial industry dried up instantly, as did trade. Real estate and retail buckled shortly after. The city turned into a ghost town– even Sheikh Zayed Road, the main ‘thoroughfare’ that was typically a parking lot in the middle of the day looked more like a lonely rural highway.
In a crunch, many of the companies under direct or indirect control of the ruling family had to go to the main office with hat in hand looking for funds.
Needless to say, with a relatively small capital base to start with and an enormous outlay of cash to make the infrastructure investments, Dubai has become cash poor and its bills are piling up. The emirate is now planning on selling 5-year bonds as part of a plan to raise $6.5 billion in order to repay outstanding debt obligations.
Ironically, the bonds are being priced to yield the same as other bonds just a cut above junk status, according to a Bloomberg report. The bond yield’s premium over the mid-swap rate is seven times greater than before the slump, no doubt indicative of the market’s risk appetite, investors’ available cash, and Dubai’s desperation to get the deal done.
The price they are paying is great, but between this successful bond sale and the backing of big brother Abu Dhabi, Dubai’s cash flow issues should be solved for the next five years. This is plenty of time for it to get back on its feet again.
I don’t expect Dubai to rise back to its former, short-lived greatness as the region’s undisputed financial and cultural champion… Abu Dhabi and Doha, Qatar, having both taken copious notes of all the mistakes to avoid, are executing their own ambitious growth plans which trump Dubai.
The three of them will duke it out for regional supremacy, like Hong Kong and Singapore. In the end, though, I think financial constraints prevent Dubai from winning– bruised and battered, it won’t make the final cut… always a contender, never again a champion.
