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Dubai’s Debt: Reality Beats Perception

If one goes by the research reports that brokerages and rating houses are churning out on Dubai, there is bound to be a feeling that the world has come crashing down on Dubai. But has it really?

There are lot less tourists for the annual shopping festival. Many have laid off employees. It is true that residents have tightened their belts too. But all this is because Dubai is a highly open economy consisting of cyclical businesses such as real estate, trade, tourism, and financial services which have all been hit by the global economic downturn.

The gloomy scenario is hardly exclusive to Dubai. Situation is lot worse in other countries, whether it is United States or China or New Zealand. In US, more than 600,000 jobs might have vanished in January alone. More than 20 million Chinese have lost their jobs and have returned to their hinterland. Politicians in New Zealand are worried about scores of Kiwis living overseas coming back to claim unemployment benefits. So why is Dubai under intense scrutiny?

It may partly be because of its debt and partly because for long, Dubai kept defying conventional wisdom of debt-driven growth, from building Port Rashid to Jebel Ali. With little natural resources and dwindling oil revenue, growth funded by debt was the only option for Dubai to surge ahead. Today Dubai’s debt is at $70 billion. Some experts have even started linking Dubai’s current situation to the aftermath of 1998 Asian financial crisis. To associate Dubai to 1998 crisis is plainly irresponsible. The causes of Asian financial crisis are well known: excessive foreign debt, imprudent management and unstable exchange rate mechanism. Debt is the only association Dubai has with the causes of the 1998 crisis. It would be a logical fallacy to confuse association with causation. Back in 1998, some Asian countries went on to squander the borrowed money. These excesses are well documented in the annals of South-East Asian history.

Dubai has used its money to build infrastructure or acquire solid assets. Dubai’s Water and Electricity Authority (DEWA) borrowed to boost the city’s power capacity. Drydocks World borrowed to buy two strategic and profitable companies in Singapore. DP World borrowed its way to become one of the world’s largest ports operator. Emaar and Nakheel went on to build a new Dubai with external funding. Even Moody’s Investor Services, which listed six Dubai government linked companies on ratings review for possible downgrade noted yesterday that the emirate’s debt predominately fuelled the city’s corporate development — domestically and internationally – and therefore has created long-term value for Dubai’s economy. It went a step ahead to make a distinction between Dubai’s debt and the conventional “government debt” which is commonly used to finance social and other non-commercial activities that offer little or no productive returns.

Over the past decade, Dubai has become an integral part of global financial and economic system, and hence it is more exposed to global economic activity.

The emirate has become a barometer of international trade and liquidity. As the gloom deepens around the world, this might be indeed a great opportunity for Dubai to re-position its economy to ride the next wave of growth.

The roads, ports, flyovers, metro systems will come in handy when the trade winds again become favourable, if the emirate makes some short-term sacrifices to secure its long-term future.

aruna@khaleejtimes.com