This paper is in response to an article that appeared in the online version of Business Week titled, “Dubai’s desert dream ends” by Stanley Reed about the recent crisis in the emirate of Dubai. The crisis has to do with how Dubai has asked for a “standstill” on the money owed by Dubai World which is a state-owned conglomerate of the Dubai Inc. group of companies. The emirate of Dubai was asking creditors to wait until May before they could be paid the debt of around $80 Billion that Dubai world owes.
This past week has seen this news from Dubai hit the financial world like a bombshell. The timing of this announcement could not have been worse for a global economy that is just recovering from a serious crisis precipitated by the collapse of the sub-prime market leading to the bankruptcy of the investment bank, Lehman Brothers. As many commentators noted, this was like a jolt to an already jittery financial system.
The article makes this point as well when it states, “The timing was horrendous, coming on the eve of an Islamic holiday, as well as the U.S. Thanksgiving. Worried investors—who only recently had begun putting new money into Dubai on the presumption that the worst was over—scrambled for information.” (Reid 14) The point to note here is that investors around the world were thinking that the worst was over for Dubai. Little did they anticipate that there was more trouble to come for the emirate that was once an example of a city that could attract western investors who were hungry for investments that would guarantee them a good return?
What is noteworthy is that Dubai’s troubles did not originate overnight. Ever since the global economy started tanking, there was speculation regarding the state of Dubai’s finances. To quote from the article, “When the credit crunch came, Dubai was badly exposed to the known debt of $80 billion to $90 billion, and possibly even more. The Sheikh and his lieutenants, who had seemed masters at selling Dubai to the world, suddenly seemed inept. That Dubai has a serious problem has been well known for more than a year. Little progress has been made to resolve it.” (Reid 9). One explanation for this is the fact that Dubai like many others was living in denial about the extent of its troubles.
As the above quote makes it clear, there were no serious attempts to resolve the problems of bad credit decisions by the Sheikh of Dubai, Mohammed al Makhtoum, who was once the darling of investors worldwide for his ability to turn what was a little-known emirate into a regional hub for transnational companies operating in the Asian continent. Much like Singapore, Dubai epitomized the success of these trading centers to become financial capitals in the region.
In conclusion, it is apparent that unless Dubai’s rich neighbor, Abu Dhabi comes to its rescue – as is widely expected- the emirate would have a little reprieve from the creditors and more importantly, the world markets would take a beating because of the fact that many companies have exposure to the Dubai market as well as the risk of counterparty derivatives that were built on top of this exposure. It is anybody’s guess about what is going to happen next and this issue also raises questions about Sovereign defaults that might happen in the near future. This is one aspect of the current global economic crisis that has not been reported extensively, barring when Iceland became the first country to default on its obligations.
Works Cited
Reid, Stanley. “‘The Sheikh’s New Clothes?’ Dubai’s Desert Dream Ends.” Business Week. Web.