Reinventing Dubai
Expatriates are back to fretting about their jobs and the fate of property prices; locals are venting their anger at top officials who overborrowed to build increasingly outlandish projects. All residents are stunned at how a famed model of brash, extravagant growth has been transformed from a beacon of hope for an entire region into a case study in crisis management.
Welcome to Dubai. The skyscraper-studded Gulf city is a changed and chastened place since last week, when neither its own government nor that of Abu Dhabi, its oil-rich partner in the United Arab Emirates, showed willingness to stand behind the $59 billion (£36 billion, €39 billion) in debts amassed by Dubai World, a flagship investment company that many investors had assumed enjoyed state backing.
In coffee shops and in the majlis meeting rooms of Dubai's villas, locals are venting their ire at the ruler's top lieutenants who, while building a modern city, also weighed it down with a debt burden estimated this week by Moody's at $100 billion.
The damage caused by Dubai's debt tremor threatens to affect the UAE as a whole: the wealthy capital as well as its brethren. But while Abu Dhabi, with more than 90 per cent of UAE oil wealth, has the means to emerge little scathed over the longer term, the "Dubai model" that had enthralled and irked onlookers in almost equal measure over the past decade is likely to be radically reshaped.
Yet for all the dismay among investors at the decision to call a standstill on Dubai World's debts, foreign businessmen and analysts are being careful not to write off Dubai's role as the region's premier service hub. Although nearby cities including Abu Dhabi itself and Qatar's Doha have been trying to catch up and establish themselves as regional centres, even a smaller, more sober Dubai will have two main advantages: a more liberal culture and a well-developed international transport infrastructure. The Jebel Ali free trade zone by itself accounts for as much as one-quarter of Dubai's economy.
But to protect that position, bankers and analysts say Dubai will have to learn from its mistakes and shed the cocksure attitude of recent years that had turned it into something resembling a highly leveraged private equity firm sinking money into fanciful real estate projects and questionably valued assets abroad. This will require a change in the way that Dubai manages its finances as much as a change in mindset.
"I don't think any other centre in the area can replace the Dubai model," says Ibrahim Dabdoub, head of National Bank of Kuwait, a regional commercial bank. "Dubai has first of all the culture: to be a financial centre is not just to have a law, it's a culture. It's the immigration officer at the airport, the porter at the hotel, the way you get a licence in a couple of days instead of [it] taking months."
The problem, however, was that "Dubai went overboard with borrowing which had nothing to do with the original business model ... The services economy turned into an investment fund."
For many of its residents – 90 per cent of them are foreign nationals – Dubai has held a unique position. The open city blended Russian money and Iranian capital, low-wage Indian and Pakistani workers and rich Arab financiers into a stratified melange of nationalities where each community was supposed to know its place.
The locals hold the top positions. Indians, by far the largest and deepest-rooted expatriate group, span labouring class to white-collar office workers; the British have been the traditional managerial class; the Lebanese the bankers and advertising executives; and Filipinos the domestic workers and shop assistants. Many Chinese also arrived in recent years to cash in on a flourishing trade route.
Within the Arab world in particular, young people identified Sheikh Mohammed bin Rashid al-Maktoum as a modern leader who was more interested in business than politics and had put their region on the global map for all the right reasons. The Maktoums, who have ruled Dubai since 1833, have been known for taking gambles that paid off. The father of the current ruler, for example, built Jebel Ali port and the World Trade Centre office tower in the face of much scepticism from local business.
But the emirate's aims became no longer confined to a role as a regional centre for the Middle East – its ambition was to serve two billion people who stretched far into south Asia. In 2004, Sheikh Mohammed famously said that what was then on display in Dubai represented only 10 per cent of his vision. A year earlier, he had been so confident of his plans that he recommended investors pour their money into Dubai instead of depositing it in banks "where it will evaporate like still water". Dubai, he went on, was delivering an 18 per cent return on investment. "Where else could you find such a rate?" No one who had put money into Dubai, he added, had ever gone bankrupt.
The ambition extended to global markets, where Dubai sought to carve a place for itself through investment vehicles that bought assets including Barneys, the New York retailer, and a 10 per cent stake in MGM Mirage, the casino operator. The government, moreover, treated many of the companies it owned as commercial entities – the argument that is being made to bondholders today regarding Dubai World. But these groups were run by the people closest to Sheikh Mohammed, who were racing to remain in his favour. Over the past few years, much bigger bets were placed. Now, those have proved to big to handle.
"It's not the model that was wrong – it's the execution," says George Makhoul, former head of Morgan Stanley in the Middle East. "Dubai built a world-class infrastructure but it didn't know where to stop. And it didn't have proper practice [needed] to build a business centre, whether in terms of independent management or independent boards. It did not build institutions."
Even before the global financial crisis struck, it had become clear that the emirate's finances were spinning out of control, with no centralised authority keeping track of the ballooning debts of state-related entities and little coordination, even within the same corporate group. For example, in 2007, Dubai World sought a $US2.7 billion Islamic bond at the same time as its subsidiary DP World was raising a large loan.
Dubai World eventually closed the deal at $US5 billion at a significant premium to the prevailing spreads on Dubai corporate debt, which forced Dubai Electricity & Water Authority, another intended borrower, to abandon bond plans the following month. "The left hand didn't know what the right hand was doing," says one financial adviser.
It was not until 2008 that state companies were told they needed approval before going out to borrow – a decision, however, that excluded the two flagship companies, Dubai World and Dubai Holding, the ruler-owned company that owns the Jumeirah hospitality chain. Dubai International CapitalHassan Heikal, head of EFG-Hermes, a regional investment bank, says these two groups account for 60-70 per cent of Dubai's debt.
Dubai undoubtedly received plenty of encouragement in its borrowing spree. Bankers complain that they entered into loan agreements on a quasi-sovereign guarantee, even if legally there was none – "It was all on a nod and a wink, an oral promise that the Dubai government would back the debt," says one – but others say that the financial sector too is to blame. "Lots of law firms and banks were keen to get in on these deals and keep Dubai on side during the boom. It was a buyers' market and everyone was willing to do deals in a way that wouldn't happen now."
The frenzied development was, moreover, managed by means of a system short on transparency and accountability. A year-long fraud investigation that has exposed mismanagement in the real estate sector is seen as part of a power struggle pitting Mohammed al-Shaibani, the head of the ruler's court, against top aides of the sheikh including Sultan bin Sulayem, the head of Dubai World and one of the ruler's closest friends, with whom he shares a penchant for endurance horse-riding.
The hyperactive Sulayem made his name at the port, building the region's most efficient transshipment hub, before he expanded into property through Nakheel, a developer, and went on to create a global investment portfolio spanning leisure and real estate assets, much of it leveraged and acquired near the top of the market.
Both Sulayem and Mohammed al-Gergawi, who sits at the helm of Dubai Holding, have lost much of their power. The authority of Mr Shaibani, who had looked after Dubai's interests in Singapore and London and developed a reputation as a fearless enforcer who fights corruption, has been steadily expanding. "Shaibani is the new kid in town, but lots of people have no exposure to him, can't reach him: he is guy who works better behind closed doors," says Abdulkhaleq Abdulla, a professor at Emirates University.
For an emirate that has put so much effort into marketing itself, hiring armies of young public relations executives and building landmark projects such as the sail-shaped Burj al-Arab complex, the past week has been a communications disaster.
The emirate's credibility has been devastated and its ability to borrow in the short term from banks and international markets has been shattered. The extent of its troubles has yet to be fully revealed and analysts worry about the health of local companies and banks exposed to Dubai World.
Part of the pain, however, will be, as one leading banker says, that Dubai will now need to scale back its ambitions and fall back on its basic business model. "It's like somebody who becomes obese and has to reduce to 90kg, and that's the tough part."
Dubai will also require Abu Dhabi's help. The current crisis has tested the relationship between two emirates. The UAE central bank, which is bankrolled by Abu Dhabi, had already extended a helping hand earlier this year to a recession-burdened Dubai. Involving Abu Dhabi further, even if it is under the umbrella of federal institutions, carries an implicit price in terms of constraints on Dubai's political and economic independence.
After a weekend of talks, however, people in the UAE say some clarity is emerging: that Dubai will communicate better with its lenders while Abu Dhabi will support the local economy and provide further assistance to viable businesses in Dubai. It would not, however, step in to rescue companies that it considers to be in effect bankrupt. "On an economic and financial level the federation has shown that it stands by everyone and the central bank is playing a leading role. But the political level is another ball game," says Prof Abdulla.
Some bankers say that to keep Dubai's ambitions in check will require more direct Abu Dhabi oversight. "If Abu Dhabi steps in and tries to manage the downsizing then eventually it will work," says one banker.
Others, however, consider the prospect of more Abu Dhabi involvement unrealistic given the delicate relationship between two emirates that cherish their autonomy – a factor that seasoned observers say investors failed to understand. As one analyst puts it: "These are not efficient relationships; they are wrapped up in political and personal sensitivities."
The globalised village
The sleepy fishing village of Dubai lured in Iranian traders by going tax-free at the start of the 20th century. It was hit hard by the collapse of the pearling industry in the 1930s but by the 1960s oil exports were funding large infrastructure projects. Mindful of its modest reserves, however, the city invested in commerce, aviation and tourism, attracting multinationals with its no-nonsense bureaucracy and tolerance of western lifestyles. This decade it drew in media and finance businesses and permitted foreigners to buy property, leading to a frenzy in the sector that ended with the 2008 global economic crisis.
A shift from exuberance to more seasoned conservatism
On the rise
Mohammed al-Shaibani, director-general of ruler Sheikh Mohammed bin Rashid al-Maktoum's court: Heads Investment Corporation of Dubai, which has stakes in government companies and oversees both the emirate's debt and support for state- linked businesses. Following his return from ruler's London office to his court in Dubai, once again the prime seat of sheikhly power, he masterminded last year's anti-corruption campaign.
Ahmed al-Tayer, governor of Dubai International Financial Centre: As a member of one of the city's oldest merchant families, his ascendance could signal a return to a more conservative financial approach. The former finance ministertook over at DIFC following a purge of Dubai's young leaders. Also chairs Emirates NBD after leading the forced merger of Emirates Bank with the National Bank of Dubai.
Abdulrahman al-Saleh, director-general of department of finance: The former senior customs executive took over at the department in May and now finds himself tasked with smoothing Dubai's passage through one its most severe financial crises.
Falling stars
Sultan bin Sulayem, chairman of Dubai World: Son of the closest adviser to the ruler's father, he made his name turning Dubai Ports Authority into a world-beater. Also launched Nakheel, property arm of the state-owned holding company Dubai World, and oversaw construction of one of the emirate's man-made islands as projects grew more grandiose ahead of last year's crash.
Mohammed al-Gergawi, Dubai Holding chairman and UAE minister of cabinet affairs: Became a close adviser to the ruler a decade ago. Made his name launching emirate's internet and media business clusters, then building up Dubai Holding's interests. Its crisis-hit property and investments arms have been forced to restructure, however, and some senior executives investigated over corruption allegations.
Mohammed Alabbar, chairman of Emaar Properties: A leading figure in the property boom of this decade. Revived the emirate's Asian holdings after a real estate downturn in the late 1980s before setting up the department of economic development in 1992. But his remit is narrower now, focusing on guiding the region's largest property firm through the crash.