Dubai Debt Crisis

Summary of the crisis:

With an objective of establishing the Middle East logistics, leisure and financial hub, the
government of Dubai had promoted 300 billion US dollar-scale construction projects over the
past four years with an ambitious scheme of turning the city into a world class tourist and
financial centre. In this process, the Dubai city government and enterprises raised funds via
global bond markets, and the amount of debts of the government and state-owned firms has
expanded greatly. The size of open debts had come to 59 billion US dollars, far beyond its
ability to repay. Dubais debt represented about 100% of its GDP. While this figure is not
unreasonable by international standards, Dubai had very little reserves of its own to offset its
debt burden. Moreover, despite its $60 billion economy, Dubai accounted for only $5 billion
(or 5%) of the UAEs revenues as Dubai had virtually no taxes. Dubai relied on transfers
from UAE Government to finance its budget. This support is critical as Dubai faced about
$20 billion in both 2011 and 2012.
Most of the debt is attached to the funds real estate arm known as Nakheel, whose projects
include the palm-shaped island in the Gulf. The crisis was prompted by Dubai World, the
development company behind three palm shaped islands as well as an off-shore replica of the
globe, defaulting on its debt. An $80billion debt default in the emirate had already
reawakened the spectre of a global 'double dip'. It was seeking to suspend repayments on all
or part of its $59 billion in debt from Dubai. Everyone had gone into panic mode. Otherwise,
British banks also teetering on the brink of a fresh meltdown after it emerged they had
invested heavily in crisis-hit Dubai. Fears of a dangerous new phase in the economic crisis
swept around the globe as traders responded to the shock announcement that a debt-laden
Dubai state corporation was unable to meet its interest bill.
The Dubai Debt Crisis has had 3 major effects.
Firstly, in regards to the Gulf Cooperation Council (GCC) and Mid East region, the Dubai
Debt crisis had carried very negative effects. The idea that government reporting entities
(GREs) are not actually owned by the government and thus not directly tied to sovereign
financial backing is a dangerous decoupling toyed by Dubai World that would have erode
foreign confidence in these markets if it was carried through to execution. Furthermore, it
was impossible to build a global financial centre if you're not playing by international
financial rules - from a respect and trust point of view, a Nakheel bond default put Dubai and
the GCC back significantly in their strategic aims. In that case, any GCC business relying on
international demand/finance and not focused on regional growth and demand would likely
suffer, as the regional players may be the only ones willing to play at the table after a Dubai
World default.
Secondly, the crisis had served as a reminder that emerging markets carry risk, and with far
less transparency than what is typically seen in the West, this risk can be magnified. There
was financial toxicity lurking in other emerging markets, which began coming to light over
the next year - posing a significant challenge to the global economy which were still reeling
from the collapses in the Western markets.

Lastly, the impact of sovereign wealth from the Middle East and specifically the GCC region
on world markets had not been studied in the detail that perhaps it should, given the
enormous amount of wealth and outflow of capital from this region into a variant of
industries worldwide. These funds played a significant role in revitalizing tired financial
markets and so the dynamics of how these funds work the transparency level that they
operate with and their capital allocation strategies should be more closely examined.
The UAE federal government prepared to provide further financial support to Dubai, which
was struggling to pay off $26 billion debt owed by troubled conglomerate Dubai World. The
UAE capital has already stepped in to offer financial support to its neighbour. If global
liquidity had been growing, and liquidity in Dubai had been ample, Dubai World would
probably have avoided this crisis. More generally, the lack of liquidity on a global and local
basis means that the pressure on vulnerable borrowers will remain severe because final
demand will continue to be weak until overall liquidity conditions ease

Guidelines or rules that could have been followed to prevent it

Judging from the current situation, the Dubai debt crisis has a limited extent and impact and,
with regard to global economic recovery, it is only an "aftershock" at best in the ongoing
economic recovery process, and its influence on global financial crisis will also be shortlived. Dubai is not the Wall Street after all, but both lessons and viewpoints on revelation
from the debt crisis have provided for people are really profound and penetrating.

Economic construction should be carried out in compliance with a nation's capacity

instead of outreaching itself to rely on large-scale money borrowing.
Economic development cannot be driven or pulled by the over-reliance on the real
estate industry. Although the United Arab Emirates (UAE) is the world's leading oil
producer, Dubai's oil resources, however, would be depleted by 2010. In this contest,
it has to shift to the real estate and tourism-related economic development.
Capitalisation structure should have been focused on other industries rather than
focusing solely on the diversification of tourism service industries and expansion of
infrastructure which in turn led to the saturation of property market in Dubai.
Monetary policy should be geared to inflation, asset price, debt build-up and global
capital flows. The depreciation of U.S. dollar in Dubai over the past two years has had
the biggest impact on the purchasing parity of the UAE dirham against other
currencies owing to its direct peg against the U.S. dollar. This has given rise to the
price increase and brings double-digit inflation to virtually all the Gulf States.
The activities of the Dubai world should have been carried under the supervision of
the government so as to reduce the frauds and embezzlements
Major attention should have been given to the expansion of other service based
industries rather than the diversification from trade based to tourism oriented
economy.

.Steps to be taken to prevent the crisis in future

1. Strong regulatory framework: The entry of small players in the market should be restricted
in the property market, this would contribute to the controlled growth in the real estate /
property sector.
Incentives like residence visa should be focused on the residents only and not the nonresidents to ensure the clarity.
2. Real estate regulatory authority: Before the major players in the market, banks invest their
money into this sector a regulatory authority should be established to regulate the various
activities and projects launched in that particular sector.
3. Transparency in the governance: The activities of the regulatory departments should be
transparent and regulated by the government so as to minimise frauds and embezzlements.
4. New consistent policies: The government should introduce the new consistent policies with
respect to the market speculation. Majority of the projects brought are with a speculative
mind set which leads to the extravagant increase in the property prices leading to unusually
higher returns to the investors.
5. Liquidity: Liquidity is very important for the country, as otherwise the country would fall
into a liquidity trap where the people would stop investing in bonds and keep their funds in
savings because of the prevailing belief that interest rates will soon rise. Because bonds have
an inverse relationship to interest rates, many consumers do not want to hold an asset with a
price that is expected to decline.
6. Fiscal consolidation: Fiscal compact rules for deficits and debt burdens in the future are
recommended for Dubai in order to stay liquid and to improve credibility. This would further
reduce the cost for investing in Dubai thus increasing the flow of funds in the country

Current scenario after the crisis

Dubai, one of seven emirates in the UAE, owes a total of $142 billion in debt, equivalent to
102% of its gross domestic product, according to the International Monetary Fund. It
received another five years to repay the loan at a 1% annual interest rate. Some $35 billion of
the total belongs to the government or is guaranteed by the government. About $60 billion
comes due between 2013 and 2017, according to the IMF.
Dubais market crashed as oil, its lifeblood, peaked. At the same, development of the worlds
tallest building, the Burj Dubai at 818 meters tall was nearly completed. The skyscraper
broke ground in 2004, as oil prices were rising, and opened in 2010. Historically the
development of the worlds tallest buildings coincide with market tops right before an
economic storm hits, according to Dave Harder and Janice Dorn, M.D., Ph.D.
Though the future looks glum, Dubais economy has received a boost since 2011 following
the Arab Spring. Arab investors purchased property, while some relocated their business from
other parts of the region. Investor sentiment has also been lifted by the easing of the emirates
debt crisis as well as the securing in November of the right to host the World Expo 2020.
The Emirate of Dubai has shown reasonable growth in its comeback period from the Dubai
Debt Crisis of 2009. Emirates NBD has forecasted a growth of 4.7 per cent, compared to 4.5

per cent last year for Dubai. Growth has not reached such heights since before the emirates
financial crisis in 2009. Moreover, the wider UAE economy is estimated expand by 4.5 per
cent this year, up from 4.4 per cent last yea

Post-Crisis Relationship between Dubai and Abu Dhabi

The relationship between Dubai and Abu Dhabi is at best, testy after the 2009 Dubai Debt
Crisis. Earlier, the relationship between the two Emirates was a very complex one, where
Dubai was seen as the raucous, excited and expanding younger sibling of the more matured
and sensible Abu Dhabi. It was clearly evident that though Abu Dhabi was highly critical of
Dubais huge spending style, there was a slight air of jealousy in the mix too.
Abu Dhabis influence is affecting Dubai in other ways. Before, Dubai was largely able to
keep its trade relations separate from Abu Dhabis foreign policy interests, allowing it to do
business with Israel while remaining steadfast friends with Iran, historically its largest trading
partner.
But Abu Dhabi, which is wary of the potential for a nuclear-armed Iran, wants Dubai to
curtail that relationship, analysts said. It recently signed a deal with the United States to build
commercial nuclear power plants, a foil to Irans own nuclear ambitions.
In the time of the crisis, at the opening of the Dubai Air show, it is said that the crown prince
of Abu Dhabi, Sheik Mohammed bin Zayed al-Nahyan was seen placing his hand over the
hand of Dubais ruler, Sheik Mohammed bin Rashid al-Maktoum, which was as a sign that
Abu Dhabi, by far the largest and richest member state of the United Arab Emirates, would
take care of Dubai.
The Dubai debt crisis was resolved soon. The UAE federal government prepared to provide
further financial support to Dubai, which was struggling to pay off $26 billion debt owed by
troubled conglomerate Dubai World. The government supported Dubai by Finance minister
Sheikh Hamdan bin Rashid al-Maktoum, because Dubai is part of the federation, Dubai
World is currently restructured a $26 billion debt. The UAE capital stepped in to offer
financial support to its neighbour. This depicts the complex relationship between the two
neighbouring Emirates.