The Dubai Crisis – An explanation
The saying some years ago was, “If the US sneezed, the world caught cold”. Looking at the developments filtering out of the Middle East in the past few days, it is fair in saying, “If Dubai sneezes, the world catches cold.” But the dominoes effect of Dubai on other economies has forced me to say that it is a bit of a VIRAL!
First, for all of you who have been wondering what the fuss is all about, let me put things in right perspective – Dubai World, an enterprise associated with the Government of Dubai, has asked its creditors to hold off on their repayment schedules. The finance on stake – A whopping $80 Billion Dollars!
Why did the Dubai economic crisis ever happen?
Dubai has been perennially known to be the most Un-Gulf state. It doesn’t rely on oil as a key driver for its economy. Instead, during its heydays between the late 1980s right until 2005, Dubai relied on tourism, real estate and commerce for driving its economy. People who lived in Dubai during these times, witnessed the transformation of what was an absolute Sand dune to a city where everyone wished to live in!
All of this had to come with its own set of pitfalls. The ambitious plans of the Dubai Government, spearheaded by Shaikh Mohammed bin Rashid Al Makhtoum to set up dream ventures at exorbitant prices had to meet with an anti-climatic end. And it did meet one, in the form of the global recession!
The global recession meant one thing – Dream initiatives like the Palm Islands and the Seven Oceans had very few takers, by the time they went live. These projects also had the backing of the Government of Dubai. Now, with not many people willing to spend their monies (Actually, they didn’t have a lot on their hands), these properties stood half-empty.
With not many units of these ventures finding customers, developers started to default on their payments back to their creditors. And this is where, Dubai World finds itself in a mess! It was just unable to find people to buy their ventures, or units in their ventures.
Global recession bought with it, a downward spiral in the prices of real estate in Dubai, but only to the tune of about 15-20%. Some of these ventures were so exotic that they had to be priced relatively high, and obviously then, they had to go empty.
The impact on Dubai itself
- Layoffs – The already reeling construction industry could see a major freefall from here. Laborers could be asked to go home and whatever little construction projects would be on the anvil, will surely be shelved.
- Banking – Local banks would surely feel the pinch of this crisis. Though, they have pledged their support to Dubai World, there could be a time not too far off from here, when they might be in the red.
- Bullion prices – Gold may see a big drop in demand. Dubai has been known to be a Gold Hub, and though it doesn’t produce Gold on its own, it seeks exports from countries like India and re-exports them to other countries, prices can be expected to go down surely.
- Crude Oil – The crude oil prices could go down too.
- Foreign Exchange – The valuation of AED (The local currency of Dubai) could see a drop. This could probably mean the strengthening of the Dollar, by a bit.
Summary
All in all – This is nowhere as catastrophic a disaster as the Sub-Prime Crisis or even the Lehmann bust. The Lehmann bust was surely a systemic malady, while Dubai World is probably in a mess due to cash-flow mismatch. The next week’s events could probably dictate, which way Dubai is heading to!