The untold story of Dubai’s current crisis is simple—greed and geopolitics. It is a story of unbridled corrupt practices by the Bharatis (Indians), and the inability of the Arabs to take control of the situation and the country. The Indian’s started out as laborers in the 70s. Dubai’s Sheikh was particularly biased towards the Bharatis (aka Indians). Dubai was poor and relatively destitute, if one compared its wealth with Abu Dhabi the wealthy behemoth in the UAE. Bharatis were cheaper than the Bangladeshi and the Pakistanis, so they flocked to Dubai (a non-oil rich emirate).
Over a period of time, the economy grew at an unprecedented rate.
Dubai witnessed an uninterrupted explosive growth over the last several years at the back of easily available cheap credit. Such an impressive growth not only created excess capacity but also bred over-confidence. The absence of oil wealth encouraged Dubai to diversify its economy by developing trade, tourism, transport and real estate. Also, a series of free zones dedicated to different sectors of the economy succeeded in attracting world-class companies and as such Dubai had positioned itself as the financial and economic hub of the Middle East. When the going was good, Dubai never looked back and continued to over-leverage itself, thus accumulating a debt of over $80 billion or 100 per cent of the GDP. In plain language, Dubai was carried away by its own success.
Last year’s global economic meltdown halted the pace of economic activity in Dubai. The non-oil sectors that Dubai developed over the years were hit hard by the global economic crisis. The value of the assets within and outside the Emirates dropped sharply and incomes from tourism, hotel and airline continued to decline, thus creating cash flow problems. The rise of sunk investment eroded Dubai’s debt-carrying capacity. Dubai: what went wrong, Tuesday, December 08, 2009 Dr Ashfaque H Khan
The mafia from Mumbai and Karela followed the early shenanigans. It was easy money. Abu Dhabi banks were willing to help out their poor neighbors in Dhabi. The Bharatis got sucked into their own schemes. Pretty soon the labor remittances became so important that they amounted to 20% of the GDP of the state of Karela. The Mumbai Stock Market got involved. Innocent investers were drawn into shady Bharati investments.
It was a ponzy scheme that went sour for the Bharatis was an accident waiting to happen. The there was an entire mafia. Even it was the old cliché of what goes up must come down
Dubai World, the flagship holding company of Dubai, with $100 billion in assets and $59 billion in debt, sought a six-month standstill agreement from its creditors on November 25, 2009. Bonds amounting to $4 billion and belonging to Nakheel – the property unit of Dubai World - were maturing on December 14, 2009. The standstill agreement means that Dubai World will negotiate with creditors to extend maturities.
It was indeed a shocking development. Stock markets around the world convulsed as investors scrambled to understand the implications of the restructuring of debt. Only two hours before Dubai revealed that it was seeking a standstill arrangement for Dubai World, it had completed a transaction of $5 billion fully subscribed by Abu Dhabi through its two state-controlled banks. Dubai has shattered the confidence and lost its credibility in the eyes of global bond investors. The question now will be about the nature of the sovereign support provided to various borrowers in the region. The cost of protecting Dubai’s paper against default has quadrupled – putting the Emirates in the same league as Iceland.
What went wrong? Was the announcement sudden? Will Abu Dhabi bail Dubai out? What is the nature and extent of Dubai’s debt burden? What are the future prospects of Dubai? How can this crisis affect Asian economies in general and Pakistan in particular? These are important questions and an attempt has been made to answer them.Dubai: what went wrong, Tuesday, December 08, 2009 Dr Ashfaque H Khan
The Bharati establishment followed the business, and the Bharati RAW was ubiquitous in Dubia. There were rumors that there were so many Bharati agents in Dubai that one day would take it over and declare it as Bharati territory—like Sikkim. Bharat already is in the advanced stages of pulling off a Sikkim in the Maldives. Dubai would have been the beginning of the Akhand Bharat that extends from the Gulf to Indonesia.
The Bharatis were banking on a swift bail out from Abu Dhabi. The Shaikh of Abu Dhabi is not stupid as the Bharatis thought he was. He stopped the dole and let them twist in the wind.
The chapter on Dubai’s financial crisis was already written some five months ago. The Economist, in its July 11 issue this year, published an excellent article under titled “Trouble in the United Arab Emirates” warning about the brewing financial crisis in Dubai by the year end. What an accurate forecast it was. The Economist, quoting Standard & Poor’s (S&P), stated that the risk to Dubai economy has increased substantially and that the uncertainty regarding the government’s willingness to provide support to Nakheel was rising as well.
The Bharatis tried to hide the numbers, and obfuscate the fake budgets.
The fact that Dubai will be facing a serious debt crisis was known to the market as well as to the authorities. It is in this perspective that in February 2009, Dubai wanted to raise $20 billion in a phased manner to honour its debt obligations. In February this year, the UAE Central Bank bought a $10 billion bond out of the proposed $20 billion transaction. On November 25, two Abu Dhabi state-owned banks bought another $5 billion bond, leaving $5 billion to be issued later.
Dubai’s debt payment obligations reached an unsustainable level. Some $13-17 billion is said to be due in 2010 with almost $5 billion due in the first quarter. The S&P has estimated that up to $50 billion worth of debt will have to be repaid by 2012. Realising the unsustainable debt payment obligations, Dubai took a decisive action to address its debt problem without apparently taking Abu Dhabi into confidence.
Dubai is wounded and its reputation is badly damaged. It will now be more dependent on Abu Dhabi for a bail-out. It goes without saying that the economies of Abu Dhabi and Dubai are too enmeshed to allow one part to fail. Abu Dhabi will certainly bail Dubai out of the crisis. However, there would be no blank cheque for Dubai. Abu Dhabi will not like profligacy of Dubai to continue on the back of its financial resources but at the same time it will bail out Dubai on a case-to-case basis to avoid a serious long-term negative impact. Dubai, for its part, will not be able to make economic or political decisions that Abu Dhabi finds disagreeable. The latter would also like to demand a stake in some of Dubai’s healthy assets in exchange for financial support. Furthermore, Abu Dhabi would push Dubai to adopt a more conservative development model.
Bharat has faced the brunt of the damage. Will the Bharatis return, or will they be allowed back?
Dubai’s crisis can be contained and will not upset the world economic recovery. Sufficient financial resources and willingness exist in this region to contain the fire. Asian economies in general and Pakistan’s economy in particular are not expected to experience a significant negative effect as the exposure of their banks in UAE are very limited and should not be a source of concern. As far as workers’ remittances are concerned, its rate of increase is expected to moderate in the short-to-medium term because Dubai’s economy is also expected to grow moderately.
It takes years to build the confidence of the global investors but it takes just one moment to shatter them. This is what Dubai did last year. Much will now depend on the way Dubai’s authorities unruffle foreign investors’ fears. Dubai: what went wrong, Tuesday, December 08, 2009 Dr Ashfaque H Khan
The writer is dean and professor at NUST Business School, Islamabad. Email: ahkhan @nims.edu.pk
It is rumored that Abu Dhabi used this as an excuse to get rid of the unwanted criminals and mafia bosses.