Falling of the Dubai Dreams

Clamoring is quite high after the Dubai debt crisis has put a halt on the six-year boom in the Emirates real estate sector. In recent times, Dubai almost became a conglomerate of real estate companies; it refused to accept the harsh reality and uninterruptedly pronounced its ambition to become the world financial centre with lot of funds pouring into real estate, including housing.
There was infact a madding rush among the rich peoples to brought some property in Dubai, a huge proportion of them was from India who had an inflated dream to be a part of that potential growth story. Dubai which is synonymous with the super creations has high stake of artificiality and illusionary stuffs within its core foundation.

Its position is of one among the seven small Emirates that’s form the United Arab of Emirates (UAE) and known for its huge oil resources, so, obviously Dubai’s economy was also originally built on oil revenue like other Emirates; but now its oil reserves have drastically diminished and expected to be very obscure in next two decade.
So, the authorities of Dubai had came out with diversification of economy towards service oriented trade, tourism and finance; state’s hyper incentives like ninety-nine year visa plan had fuelled that sentiments although very soon promises of such liberal visa programme have been scrapped and now being offered to only six months which creating huge impasse among the reality investors from across the world and especially from developing Asian economies.

In the early phases of global financial crisis, emergence of Dubai as top-notch financial centre were taken as an unprecedented opportunity in the gulf region and also conceived as potentiality to escape from the problematic Wall Street failure. So, Dubai initially gained from Wall Street crisis and blindly inspired for global integration; today more than eighty percent of its population are constituted through the expatriates, among half of them are from India.
India, fortunately despite accounting around forty percent of Dubai’s population, its financial exposure is relatively too small; the Indian banks and real estate companies that operate there haven’t reported major outstanding debt albeit, Indian migrants be would share significantly in upcoming job losses.

The State Bank of India has an exposure of about Rs1, 700 crore and the Bank of Baroda has let Rs4, 000 crore; private sector banks have far larger exposures but not so much to see its impacts on macro scale.
Although India’s large real estate companies have bit of more exposure than banks but the hope persists that they are not in danger of loosing their shirts in Dubai. However, what the country does need to worry about is inbound investment from Dubai, especially in ports; Dubai World’s subsidiary, DP World is an important player in India and its $500 million investment plan for the country might be affected.
The crux of Dubai’s debt crisis left a lesson for India relates to the risk of opening up its financial markets with reckless speed and without building in proper regulatory safeguards, what India needs presently to de-link the further exposure from Dubai and must stop scouting for fresh opportunities till crisis halted.
Amazingly, in the end October, Federation of Indian Chambers of Commerce and Industry (FICCI) has organized a day long seminar in New Delhi with the Dubai International Financial Centre (DIFC) to trace the new avenues of trades, Prime Minister of India also attended this programme nevertheless, at least for the time being, such initiatives must be checked and any further investment endeavor also restrained with this crisis ridden economy otherwise our sharing may be strikingly rise to the danger level…a tepid response from our side is an appropriate answer to this greed driven crisis.

Dubai World, the investment conglomerate of the Sheikhdom at the centre of the crisis, has a debt of $59 billion- a major component of Dubai’s total debt of $80 billion. Further its announcement of delay of debt payment for at least six months tumbled the world stock markets, following which business confidence around the world deteriorated.
The U.S.dollar also strengthened against a basket of global currencies in the last couple of fortnights, this trend is likely to continue in the short term and in turn, put pressure on equity market. Trend is going to be some how reversal from immediate past when both accounted and unaccounted global money started chasing real estate lending to even “day trading” in real estate, there was even cases of buying in the morning and selling in evening, but eventually things were fall apart as excesses of anything has a limit.

Recklessness was all around the corner, DP World; subsidiary of state owned Dubai World purchased the British Ports operator P&O in 2005 and became the fourth largest Ports operator in the world. Later it also brought the department store group Barneys New York in 2007 and has since invested heavily in construction project in Las Vegas (U.S.A); following the same path property developers Nakheel had infused billion of dollars on creation of an artificial island – Palm Jumeriah.
So, naturally things had to burst out as these all moves were flowing out of stream and capacity with huge amount of unaccounted black monetary sources, that’s now going to create worrisome situation for lakhs of entangled investors.
The basic things which worth of anticipating is now, Dubai would be bail out from current mess but demands of unparalleled luxury would remain a grave constraint; from the investor’s point of view, sluggish trade movement and low return on their investment will be a haunting reality in near future. Anyway, Abu Dhabi with its reserve of $700 billion Sovereign Wealth Funds (SWFs) could be a safest bailer for Dubai in present circumstances but any other experiment of options like credit default swaps or other derivative instruments can hardly attain the goal now.
For the time being, Dubai must approach for regional co-operation with its other six Emirates and especially with the Abu Dhabi can earn some solace for remaining world as they have already suffered a lot from policy misadventurism. Eventually, luxury has its own spaces but austerity can makes humankind happier with less worries and mind without fears.

Atul Kumar Thakur
November 6th2009, New Delhi
atul_mdb@rediffmail.com