Dubai slips

"What I have achieved for Dubai is only 7 per cent of my vision".

Published : Jan 01, 2010 00:00 IST

THE ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum, was in an expansive mood at a lunch he hosted for visiting foreign journalists at his opulent palace in the third week of November. Speaking a few days before the emirate defaulted on loan, he said he was confident Dubai would keep on growing at an even faster pace. The future belongs to China, India and the Gulf, he said.

Dubai, he claimed, had in fact profited in many ways from the global recession. As an example, he cited the expansion of the fleet strength of the flagship Emirates Airlines. He said the airlines acquired new planes at a much lower price because of the recession in the aviation sector. What I have achieved for Dubai is only 7 per cent of my vision, he said. On an earlier occasion, he had said that he had achieved 10 per cent of his grandiose vision to make Dubai a rival to Hong Kong and Singapore. Sheikh Mohammed, who is also the Prime Minister of the United Arab Emirates (UAE), said he had downgraded the percentage because his ambitions for his city-state had expanded even more.

A few days later, on November 26, the bad news about the real state of affairs started trickling out. Three out of his four closest financial advisers were sacked from the Investment Corporation of Dubai, which supervises all government businesses. Then came the news that Dubai was seeking a six-month moratorium on the debt of Dubai World, the government-owned holding company. Dubai World has $59 billion in liabilities, a significant proportion of the emirates debt of $80 billion. Some analysts say that the debt is closer to $120 billion.

The announcement shook the global market and threatened to prolong the recession. A statement issued by Bank of America said: One cannot rule out as a tail risk a case where this could escalate into a major sovereign default problem, which could then resonate across global emerging markets in the same way Argentina did early this decade or Russia in the late 1990s.

The Dubai financial crisis has affected world share market prices and raised insurance costs for national borrowings. It is feared that countries such as Greece and Hungary could follow in Dubais footsteps and declare a debt default.

Already there were some signs that all was not well in Dubai. Many of the cranes and heavy machinery around the construction sites remained conspicuously idle. While riding in Dubais brand new Metro, one saw a huge parking lot full of cars abandoned by fleeing expatriates who either could not repay their loans or wanted to cut their losses. There were not too many passengers in the trains, which by the way has a Gold Class.

The formal opening date of the worlds tallest building, the 810-metre-tall Burj Dubai, has been postponed once again. Real estate prices have crashed in the city by more than 50 per cent. Many prominent Indians have invested in the real estate market here. Many of the Indians employed here work in the real estate and construction sectors. A substantial amount of Indias foreign remittances come from the Gulf. Indians in the UAE account for 10 to 12 per cent of the annual inward remittances.

Finance Minister Pranab Mukherjee told the media that the impact of the crisis in Dubai would be minimal but admitted that Dubais problems could result in the return of many Indians. Forty per cent of the UAEs population is from India although Indians do not have citizenship rights.

Many economists and experts on the region believe that Dubai has the potential to bounce back. During the boom years, Dubai had invested in assets all over the world, which can be easily converted into cash. Dubais location as a strategic trading hub in the region makes it an important centre of international trade and commerce. Iran is the UAEs biggest trading partner. Iran does billions of dollars worth of trade through Dubai as it tries to negate the adverse effects of Western trade sanctions. The American pressure on international banks to deny Iran credit has had an adverse effect on Dubais economy. Some experts believe this could be one of the factors responsible for the financial turmoil in the emirate.

At the same time, the UAE has allowed the United States and France to have military bases on its territory. Iran and the UAE are also involved in a dispute over three tiny islands in the Persian Gulf Abu Musa, Tunb and Lesser Tunb. The islands were annexed by the Shah of Iran in 1971. The UAEs Minister of State for Foreign Affairs, Anwar Gargash, said there were some complications in bilateral relations but hastened to add that Iran is a neighbour, not a problem.

Above all, it is unlikely that the cash- and oil-rich Abu Dhabi will let its cousin sink in the desert quicksand. Abu Dhabi, the largest of the seven emirates that form the UAE, has built up a sovereign wealth fund estimated at $900 billion. Besides, Abu Dhabi has one-tenth of the worlds known oil deposits. The ruling families of Abu Dhabi and Dubai are closely related. Already, the effects of the economic crisis in Dubai are being felt in Abu Dhabi. The government there will not want Dubais troubles to spill over and spoil its ambitious plans to become the leading financial and cultural centre of the Arab world by 2030. Behind-the-scenes negotiations are going on between the officials of the two emirates.

It is clear, however, that Abu Dhabis ruling family, the Nahayans, are not in a mood to give a blank cheque to the Maktoums. A senior Abu Dhabi official said that his government would pick and choose when and where to assist. Dubai may have to part with equity stakes in some of its major assets. An increasingly assertive Abu Dhabi may also demand a greater say in the running of Dubai. Given its size and wealth, Abu Dhabi should logically be the first among equals in the federation. It occupies 80 per cent of the UAEs territory.

A result of the financial crisis could be the diminishing of Dubais ability to steer a totally independent course in financial matters and the strengthening of centralised decision making. Abu Dhabis role in the running of the federation will be further enhanced. Abu Dhabi had initially given Dubai $15 billion and has promised to help its neighbour on a case-by-case basis. The President of the UAE and the ruler of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahayan, in a statement issued after the Dubai default, said that the country is stronger and better, and that our economy and society are healthy.

The Governor of the UAEs Central Bank, Sultan Nasser al-Suwaidi, told the visiting mediapersons that there was no liquidity crisis in the country. We came out of the crisis a few months ago, he said. The economy, according to al-Suwaidi, was looking up. Ten million tourists visited the country in the last six months, and trading, which had declined, is picking up, he said. Al-Suwaidi revealed that real estate, which is the third largest business sector after oil and trade, would take a longer time to recover.

According to al-Suwaidi, the recovery rate will differ from region to region. Construction activity in Abu Dhabi seems to be proceeding in full steam, with many ambitious projects on the verge of being completed. Unlike in Dubai, real estate and rental values have not plummeted steeply there. Within a few years the real estate problems will be resolved and the economy will start recovering from 2010, al-Suwaidi averred.

He said that the UAE had no plan to delink from the U.S. dollar. The U.S. dollar will be the instrument for investments, he emphasised. There is pressure from other Gulf countries to delink from the sinking dollar. There is also talk of a common currency being adopted by the members of the Gulf Cooperation Council (GCC). The UAE had opted out of the GCCs plan for a single currency, but with the U.S. dollar plummeting, there seems to be some serious rethinking going on in Abu Dhabi on the subject.

Abdul Aziz Ghurair, the Speaker of the Federal National Council (the UAEs Parliament), stressed the fact that the emirates remained the second largest economy in the Arab world, after Saudi Arabia. The Federal National Council, he said, had played a key role from 1971 to put in place the political and economic infrastructure of the UAE. We are the only federal country in the Arab world, he said.

Democracy in the UAE is still at a nascent stage. The emphasis is on maintaining the identity of the Emirati people, who constitute a minority. Out of a population of more than five million, only around 900,000 are UAE nationals. The rest are expatriate white- and blue-collar workers. With so many expatriates, it is easy for us to lose our identity, the Speaker said. All the same, he said that there would be no restrictions on expatriates coming to work in the UAE.

Anwar Gargash acknowledged that the glitzy development model of the UAE had come in for negative perceptions. He admitted that issues relating to the countrys treatment of migrant labour continued to persist. The government is trying to ensure that the expatriate labour force, which is responsible for most of the hard work that made the UAE what it is today, is protected by stronger laws. It is still a work in progress, he said.

The UAE, which consisted of a few fishing villages 60 years ago, has come a long way. In 1951, there was only a single hospital. Now the best medical care is available. The average life expectancy of males is 77 years and for women it is 80 years. Gargash claimed that the most successful single story in the UAE was the presence of women in all walks of life in a socially conservative society.

The UAE is among the handful of countries to have signed a 123 Agreement with the U.S. for peaceful use of nuclear energy. The signing of the deal has brought the country even closer to the U.S. By 2030 we will solve all our energy problems, the Minister said, adding that it was extremely important for other countries to emulate the UAEs transparent and peaceful nuclear programme. He was no doubt alluding to Iran. Gargash said his government wanted Iran to accept the latest proposals of the International Atomic Energy Agency. The UAE wants a diplomatic resolution to the dispute; it wants to be recognised as a regional power.

Lubna al-Qasami, Minister of Foreign Trade and the first woman to hold such a senior post, said that Iranian banks and companies were allowed to operate freely in the UAE. The question of reviewing ties with Iran, she said, would only be taken at a multilateral level. Any military confrontation between Iran and the West will mean more trouble for the UAE, already reeling from the shock of the Dubai meltdown. Iran has threatened to close down the Hormuz Straits, the main artery for sea trade in the bustling Persian Gulf.

Nasser Ahmed Khalifa al-Suwaidi, Chairman of Abu Dhabis Department of Economic Development, said that the countrys goal was to integrate its economy with the world economy. The government, he said, would ensure an annual growth rate of 7 per cent until 2015, and thereafter 6 per cent. This will mean that Abu Dhabi will grow at a fast yet sustainable rate. The Abu Dhabi governments ambitious Vision 2030 focusses on diversifying the economy, which is still heavily dependent on oil exports. The aim is to ensure that the non-oil sector forms 64 per cent of the economy. The Vision 2030 policy paper states that the goal is to build a sustainable and diversified high, value-added economy.

The government of Abu Dhabi is confident of increasing gross domestic product (GDP) by five times by 2030. This will mean a healthy growth in investment and an increase in wealth for all those residing in Abu Dhabi. Khalifa al-Suwaidi said Abu Dhabis oil and gas reserves were expected to last at least for another 100 years. The centre of gravity in the UAE seems to have already shifted from Dubai to Abu Dhabi. The much-vaunted Dubai model of development has given way to a slow, steady and understated Abu Dhabi style.

Abu Dhabis Masdar Initiative, which plans to build a zero carbon city, is an illustration. The city will house around 1,500 clean-tech companies, with 40,000 residents and 50,000 commuters, providing a research and test base for renewable energy technologies. According to Sultan al-Jaber, the CEO of Masdar, Abu Dhabi wants to position itself as the technology hub of the region. We will develop human capital in the sustainable and renewable energy sector, he said. Masdar Phase-1 will be completed by 2012. Masdar has already put up three solar plants in Spain and the largest windmill system in England.

In a few years, Abu Dhabi will have its own Gugenheim Museum. Also on the anvil are plans to set up a branch of the Louvre, Paris famous art gallery. Art exhibits, including works by Picasso and other famous artists, are already on display. Dubai and its misfortunes seem far away.

The Abu Dhabi government will pump $200 billion into various development projects in the next five years. Abu Dhabi already boasts an F1 track on Yas Island. The 2009 Grand Prix was held there.

The UAE is likely to emerge relatively unscathed from the Dubai fiasco even in the short term.

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