Abstract
This research article evaluates the debt fiasco in Dubai. The paper starts with the distinction between Dubai and Dubai world, and then proceeds to describe the nature of the liability crisis in Dubai. Additionally, the research evaluates the intervention by Abu Dhabi, reviewing the reasons and effects of the intervention. Finally, the article evaluates the crisis outcomes.
Dubai is an UAE emirate. The UAE is a union of seven emirates in the Persian Gulf. The emirates are ruled by emirs. In most cases the rule is by personal decisions of the emirs. Dubai has significantly transformed from an oil dependent state to the present situation where oil accounts for about 10% of the economy. It has grown from an oil-based economy to diversification in areas of business characteristics of western economies.
The Dubai government approached the diversification by increasing public spending on investment and to boost venture capital. This means that the government is involved in most projects within the emirate. The government does this through a venture company. Dubai world is the venture company that runs different investment portfolios in varied fields on behalf of the government.
The Dubai economy ranks third globally, while its per capita income is placed fourth. There has been speedy growth promoted by the government’s effort to brand the emirate as an economic hub full of opportunities. The government has also adopted a laissez-fare approach to social issues, unlike other Muslim states.
The government’s efforts led to a rapid increase in the volume of construction projects. Landed-property industry grew rapidly with numerous building projects being initiated. Most ventures were financed through credit from the global finance. The problem started in 2008, with the exponential growth in landed property in Dubai.
There was an over expectation on the industry and investors started projects with increased growth postulates. This was, however, compromised by the worldwide crisis which led to reduced spending and the consequent lack of demand in numerous good and services businesses.
This debacle was revealed when the Dubai government presented a declaration to urge its creditors to reschedule the debt repayment. Some Islamic bonds were near maturity and the government had no money to honor its obligations. It requested creditors for a standstill and a redrafting of the payment schedule. The ensuing debt crisis extended through 2009 and is still felt in 2011.
The government of Abu Dhabi promptly countered the crisis together with the central Bank of UAE. They offered Dubai a $10 billion loan. This was meant to cater for the immediate loan repayment of the matured bonds.
Financial analysts link the progression of the predicament to the government’s investment in landed property in US. Others opine that the crisis was a result of personalized decisions practice which is the phenomenon of the emirate’s government. Blame has also been laid on the Islamic bonds, Sukuk of Nahkeel. However, more objective analysis reveals that the Dubai government and Dubai World used public funds increasingly indiscriminately in the last decade
The speculations on the state defaulting on it’s a loan may have stirred the Abu Dhabi into action. Defaulting would have affected the cost of borrowing and reduced admittance to global money markets. Furthermore, Abu Dhabi may have eyedfor compromise from Dubai in return for bailing her out.
Introduction
Dubai is an UAE emirate. It precedes only Abu Dhabi in land size. In terms of population size, it is the largest. The emirate has a town in the northern coastline bearing the identical name. Abu Dhabi is the only other emirate with veto power in the UAE government. From the initial settlement in 1833, the occupation of the region by UK in 1892, and the discovery of oil in 1966, the region increasingly grown.
Reference to Dubai often refers to the city. The city has attained a global configuration and is an economic hive. It has grown from an oil-based economy to diversification in areas of business characteristics of western economies (Davidson, 2008). However, this growth was upset during the economic crisis experienced during 2007.
Dubai world is a venture company that runs different investment portfolios in varied fields on behalf of the government. It is tasked with the duty of promoting Dubai and giving it international credence in the world of business. The PM oversees the corporation. The corporation is a holding outfit. It has various companies in its structure. The most featured in this article is Nakheel, the property division of the corporation.
At the centre of the crisis is the investment division of Dubai world. The government, through Dubai World, borrowed money to finance development projects in the emirate. These projects were aimed at aiding the emirate in its quest to move from oil dependence. The projects targeted the service industry especially tourism. Most projects were tied to luxury. Other projects have been dubbed as attempts to compete with western nations. The economy did not grow according to postulates, and this led to the collapse of the landed property sector.
The Economic Crisis in Dubai
UAE has exhibited incredibly high growth trends across the globe. The GDP exceeded the $ 0.27 trillion mark in 2009. The economy ranks third globally, while its per capita income is placed fourth. The UAE is exceedingly urbanized. The economy was initially dependent on oil, but receding oil reserves led to diversification to other portfolios.
This included service, tourism and construction sectors. This led to a rapid increase in the volume of construction projects. The ventures included high rise erections, lavish hotels and resorts across the region. Consequently, the rate of property shot as the demand increased. In 2008, there was a reducing demand for the luxury buildings and tourism resulting in the crash of the economy. As a result of the recession in the construction industry, banks experienced losses.
The problem started in 2008, with the exponential growth in landed property in Dubai. The over-expectation in the performance of the industry created surplus supply. The result was a descent in property worth. The crash was as worse as 40 % drop in property value by 2009.
The dawdling transactions were accompanied by reduced profit precincts (OBG, 2008). This debacle was revealed when the Dubai government presented a declaration to urge its creditors to reschedule the debt repayment. This declaration led to more panic in the fiscal arena. The drop in demand and the slump in growth had created a debt crisis for Dubai World.
Dubai World responded abruptly by asking creditors to reschedule loan repayment, this response caused further damage, locally and globally. The declaration was initially indistinguishable either as delay or default. This was until the response by the UAE.
The crisis has extended to 2011. This was evidenced following the government’s revelation about 200 property transactions withheld from execution following the crisis (Gammell, 2011). This information is supposed to have been accompanied by plans for a bond issue. These documents showed that RERA, the landed property regulatory body, had evaluated the chances of the projects being completed as minimal.
Statistic further indicated a fall in the sum worth of landed property transaction from 119.4 billion dirham in 2010 compared to 152.9 billion in 2009. This was convoyed by reductions in land sales by 14.9%, with only 129 projects completed since 2009.
Abu Dhabi’s Financial Help
The government of Abu Dhabi promptly countered the crisis together with the central Bank of UAE. They provided a $ 10 billion bailout for Dubai World. The state firm had got stuck in billions of debts following the unpredicted slowed growth in the construction sector. 41% of the funds were to expedite the payment of the company’s immediate debts (Mathiason, 2009). The remaining portion was set to aid in fulfilling their commitments to creditors and contractors.
Financial analysts link the progression of the predicament to the government’s investment in real estate in the US. Emaar, the foreign investment docket of Dubai world, bankrupted while investing in the US, transferring the US crisis to the Emirates. This position is, however, tentative due to the nature of Islamic banking. Though it has been acclaimed for being resilient during the worldwide turmoil, it is still not connected to the global financial system (Zubair, 2010).
A major characteristic of countries in the region is that they are ruled by personalized decisions practice. This means that the initiation of modern autonomous institutions has been little. The investment decision of Dubai World to lease hefty sums of money for venture during the boom period of 2005-2007, was largely personal decision.
These decisions may be decent, but the lack of democratic institutions meant that no keen re-evaluation of such decisions was done. Analysts opine that the fiscal policies in the country cannot be substantially analyzed because of lack of reports on many areas.
The Islamic bonds, Sukuk of Nahkeel were also presumed to be the cause of the crisis in Dubai. Their perceived contribution in the debacle was because they were the subject of the declaration requesting a stand still. The declaration was in November due to the Islamic bonds that were due on December.
Due to the Islamic prohibition on the collection of interests, the Sukuks, though referred as Islamic bonds, are quite different. The Sukuk certificates embody tenure claims in the subject tangible assets. This means that the holders of Sukuks are beneficial owners of the property, and entitled to the profits of the ventures. In the secondary markets, the Sukuks holders sell the Sukuk, but not the debt claim which is illegal (Salah, 2010).
Under these policies, concerns for guarantees and proprietary protection are complicated. In fact, analysts argue that the contractual agreements in these bonds are inadequate in offering protection to guarantors in case of insolvency. However, the percentage of the value of the Sukuks in the whole volume of money involved, has led to analysts disqualifying the claim on their share of the debacle. The debts in Sukuks accounted for only 6-7% of the entire debt (Zuhair, 2010).
A more objective analysis reveals that the Dubai government and Dubai World used public funds increasingly indiscriminately in the last decade. The funds were used in a variety of property developments, many of which were in an effort to match up with other big economies. These projects had little social benefits and guarantee of lucrative private proceeds. The effects of this were an disproportionate leverage visible in the crisis; projects halting, repatriation of experts and general out-flux of human resource (Lerner, 2009).
Behind Abu Dhabi’s intervention
The speculations on the state defaulting on it’s a loan may have stirred the Abu Dhabi into action. If the default was effective, it would have been record since the Argentinean crisis. The impact on the property market, inside Dubai, Abu Dhabi and the rest of the globe would have been extensive (Bianchi, 2009). The investment funds are from rich western countries. The financing banks, such as RBS and standard chartered were heavily exposed.
The effect on these banks would have destroyed the Dubai’s and UAE reputation as an economic hub. Default on the loans would compromise future investments. IMF postulated that the crisis could affect markets by making them less upbeat about quasi–sovereign and private risks. This would have the effect of hiking the cost of borrowing and reduction in admittance to global money markets (IMF, 2010).
The reduction in the value of property has affected the economies with investor losing on large scale due to lack of demand. The intervention of Abu Dhabi has been seen as a face-lift to the state, resulting from its claim to take care of Dubai. This claim aided in heightening the investor’s confidence in the market and led to the boom.
Another cited reason for Abu Dhabi’s intervention is the cohesiveness of the UAE. If the UAE led by Abu Dhabi let Dubai deal with the debt crisis alone, it would have compromised the union’s cohesiveness. The degeneration would have culminated in the loss of the collective bargain held by the Union.
Abu Dhabi may be eyeing for compromise from Dubai in return for bailing her out. These concessions may include trade with Iran, and the development of Emirates Airlines in later days. Notable observations include the renaming of the unprecedented tower after completion. The tower was earmarked Burj Dubai; however, after completion it was renamed Burj Khalifa, in honor of the ruler of Abu Dhabi.
Additionally, images of the ruler line up roads and lobbies of major hotels (Christensen, 2011). Analysts also have cited a reign-in approach to the bail out. Abu Dhabi has viewed Dubai as errant, and some of the concessions have been noted on the leissez-fare approach to policies (Shaffer & Ziyadov, 2012).
In an IMF report, the institution estimated a short term rollover risk as a result of the maturation of $ 60 billion in debts during the 2011-12 period. It further opines that the government and linked corporate firms might fail to refund the debt due to elevated government support expenditure. This would increase the strain on fiscal accounts and the financial system (IMF, 2011).
Conclusion
The debt predicament has battered the country toughly. Positively is has exposed the weakness of the system providing channels for reformulation of fiscal policies in the region. The personalized nature of the administrative process has been critiqued. However, as recent trends indicate, there is observed revival of the industry, with peaking property prices. This is owed to the relatively stable political atmosphere, oil and its hands-free approaches to development.
The move of Abu Dhabi was hailed globally, and was very instrumental in saving the image of Dubai internationally. The intervention reassured investors about the security of their investments, and thereby securing future prospects. However, the restructuring of the debt repayment has merely postponed it, and there are persistent fears of a recurrence in the 2015-2016 period, when the new deadlines mature.
More permanent solutions lie in reducing consumption per head in the UAE. This is very high in the region, 27 dollars per individual daily. Personal loans grew by over 10% in 2009 and are expected to grow. These occurrences reduce investable savings and increases inflation. The introduction of expenditure tax would serve well in the region. The effect would to cut israf (wasteful spending) and release more funds for economic development.
The over dependency on western imports has resulted in huge outflows of cash. More inter Muslim trade would benefit the region. Apart from solving the out flux, it could promote mutual investment, preventing the necessity of huge loans fro the global financial market. Furthermore, as cited by other analysts, there is need for a migration from short-term commercial financing to long-term investment facilities. Concerning the Islamic bonds, the doubt and controversy surrounding then must be solved. There operation must be legally flawless to reduce panic from investors.
References
Bianchi, S. (2009).Dubai debt freeze to hit property recovery. The Wall Street Journal. Web.
The article was written soon after the announcement from Dubai world asking for a debt payment reschedule. The author compares the debt crisis to the Argentinean debt, if Dubai defaulted. The author sought the opinion of a partner at an investment firm, HEXAM capital, with operations in Dubai.
This makes the article valuable because, apart from presenting some facts about the crisis, it presents the opinion of an investor affected by the crisis. It presents an example of how investor’s perception of the Dubai market was affected by the crisis. The data presented in the article is extracted from several firms, making it a fair representation of the situation then.
Christensen, S. (2011). Frommer’s Dubai. New York, NY: John Wiley & Sons.
This book, and the Frommer’s, series is a tourist guide. This book presented the conversion of Dubai from an oil-dependent nation to an economic hub and a tourist destination.
It also gives insight to the nature of the projects undertaken by the government. It shows the government’s emphasis on luxury oriented structures. It also portrays the emirate’s liberal atmosphere in regard to religion, dressing and entertainment. This is one area that sets Dubai apart from other Arab nations.
Davidson, C. M. (2008). Dubai: the vulnerability of success. New York, NY: Columbia University Press.
This book looks into the history of Dubai since it was first settled up to the present situation. It also discusses the shift from reliance on oil to other forms of economic activities. This book shed light on the way the emirates are ruled which was helpful in determining what led to the crisis. Additionally, the book addresses the problems of a rapidly growing economy, such as Dubai.
Gammell, K. (2011). Dubai’s financial crisis laid bare as 217 new properties axed. The Telegraph. Web.
This article presented up-to-date information on the debt crisis in Dubai. It provides insight into the current status on the debt crisis, and the persistent effects of the crisis. It evaluates the latest RERA reports on the state of landed property development.
The author, also makes mention of the extravagance of the Dubai government in landmark projects. However, the value of the article to this work is its elucidation on the current intervention on the debacle through a bond issue. It shows how the property market has not recovered from the debt crisis.
IMF. (2010). Dubai hit by credit crunch. Finance and Development, 47(1), 52.
This IMF report first introduces the antecedents to the debt debacle through an evaluative perspective. The report, however, focuses on the future implications of the crisis to Duabi. It mentions an array of effects in the medium-term and long-term outlook. It also provides data on previous, current and projected growth rates. It evaluates the effects of the crisis to the fiscal market, especially, the banks. Additionally, the article evaluates the contribution of fiscal policy to the crisis.
IMF. (2011). Staff country reports. Washington, D.C: IMF.
The IMF documents contain comprehensive evaluation of Dubai with supporting data and tables. It focuses on policy and its effect on financial institutions in the UAE. It provides ample investigation on the economic effects of the debt crisis, providing graphical and tabled presentations on various economic indexes.
The report, however, focuses on policies being implemented after the crisis and the response of the property market to these policies. Importantly, it sheds light on the effect of the rescheduling of the debts, and the new dates of the debts maturation.
Lerner, J. (2009). Boulevard of broken dreams: why public effort to boost entrepreneurship and venture capital have failed and what to do about it. New Jersey, NJ: Princeton University Press.
This book starts by evaluating whether bureaucrats can help entrepreneurs. It goes on to discuss how governments fail due to ineffectual implementation. Additionally, it highlights the pitfalls presented by sovereign funds. Dubai has adopted public expenditure to boost venture. The government, through Dubai world, embarked of getting credit and utilizing it in endeavors to boost entrepreneurship in the country. This book highlights the effectiveness of such approaches and why they fail. This is connected to the crisis, since the debts were sourced by the government.
Mathiason, N. (2009). UAE central bank vows to honor Dubai’s debts. The Guardian. Web.
The article was written soon after the announcement of the central bank of Abu Dhabi announced its plans to finance Dubai’s debt. It presents the figures on the sums the banks intended to release to Dubai. Most importantly, it features the opinions of financial institutions regarding the intervention.
It includes a quoted response from Stan chart CEO regarding the intervention. This is important since the bank was one of the chief financiers in the region. It also highlights the apprehension among investors and financiers regarding the fate of their investments and debts, consecutively.
Oxford Business Group. (2008). the report: Dubai 2008. Oxford, OX: Oxford Business Group.
The author organization facilitates investment in Dubai. This book written before the crisis helps the understanding of the pre-crisis Dubai. This focuses on its development, diversification and democratization through the years. Though it may be biased in an attempt to sway investors, it provides a fare basis for comparison with the post-crisis Dubai. It provides historical information, geographical and demographic information. The document contains comprehensive evaluation of Dubai with supporting data and tables.
Reynard, C. & Marr, J. (2010). Investing in emerging markets: the BRIC economies and beyond. UK: John Wiley & Sons.
The book discusses the precariousness of emerging markets. It evaluates the opportunities and accompanying risks presented by emerging markets. The article evaluates the risks faced by investors in emerging markets, of which Dubai is one. In the book’s focus on Dubai, it critically evaluates the government’s expenditure, and its contribution to the crisis. It provided insight into the nature of the government’s projects, and the contribution of this to the crisis. It also provides postulates of the future effects of the debt.
Salah, O. (2010). Dubai debt crisis: a legal analysis of the Nakheel Sukuk. Berkley J. International Law Publicist. 4, 20- 32.
The article comprehensively evaluates the nature of the Islamic bond and how they work. It starts with an evaluation into the conditions surrounding the formulation of Islamic bonds. Further, it evaluates how the bonds operate, and the security offered to financiers in the use of the bonds.
This was important in deciding whether they contributed to the crisis. The article also evaluates the possible courses of actions which were available to the bond owners if default had arisen. This helped give insight into the reasons for intervention by Abu Dhabi.
Shaffer, B. & Ziyadov, T. (2012). Beyond the resource curse. Pennsylvania, PA: University of Pennsylvania Press.
The book evaluates the politics and economies of countries with numerous resources, for example oil. It evaluates the constant perils and policies in these countries.
The book evaluates the post oil economy of Dubai. In Dubai, it evaluates the causes of debacle. It discusses the antecedents to the boom, and the occurrences during the boom period. Finally, it evaluates what ended the boom leading to the crisis. It compares the government and the private sector culpability in the crisis. This was useful in determining what led to the crisis.
Zubair, H. (2010). Dubai financial crisis: causes, bail out and after, a case study. Journal of Islamic Banking and Finance, 47-55.
The article is primary resource. Zubair analyzed the crisis from inside the region.
The article analyzes the crisis from the start, giving insight into the form of government in Dubai and how the form of government has affected the economic situation in Dubai both in the pre and post crisis period. While discussing the bailout offer, the author cites the possible reasons and issues of concessions incurred by Dubai. The article also attempts to look beyond the immediacy of the crisis, evaluating policy concerns.