Sudip Bandyopadhyay’s Blog

It is hardly surprising that even the brashest of boom towns is vulnerable in a financial crisis now tipping into a recession. But it did come as a bit of a surprise to Dubai.  It is, admittedly, a paradox that liquidity should be an issue in a region awash in surplus cash. But modern Dubai, is the inventions of globalisation. Dubai is vulnerable on three counts. It borrowed heavily abroad, building up a stock of debt in excess of national income. It says it can cover the next seven quarterly repayments but some lenders and investors worry about the opacity of government accounts. Second, the sheer size and exuberance of its property boom has attracted prophecies of doom: Dubai has more than doubled in size and house prices have nearly quadrupled over the past five years. Third, as a trade and tourism hub it will be hit by the international downturn just as it was building critical mass as a regional financial centre.  Yet, real though these concerns are, they are probably overdone.  Foreigners have indeed pulled out capital, needed elsewhere to combat the credit squeeze. Some of it was in any case a bet on the United Arab Emirates removing its currency peg to the dollar.  The government has moved to shore up the balance sheets of local banks. Ultimately, Dubai can rely on the unquestioned solvency of oil-rich Abu Dhabi, senior partner in the UAE federation, which has the largest sovereign wealth fund in the world.  Dubai can probably also engineer a soft landing for the property market. It is reviewing its pipeline of projects; a few towers less will do no harm. As the government controls the two main developers it can manage supply. This is, furthermore, no ordinary market: apartments that come with residence permits are ideal boltholes for rich citizens of less stable countries such as Pakistan, Russia and Central Asia, Iran and most of the Arab world.  Dubai is also more than a building site. Behind the glitzy facade of five to seven star hotels are clusters of knowledge industries but also less glamorous businesses such as scrap metal and second-hand cars, in both of which it is a world leader.  A real-estate correction is no bad thing anyway. Breakneck growth has brought congestion, inflation, and financial irregularities that the government is now investigating as a threat to the emirate’s reputation. A pause for breath is welcome.