Home > Economics > Is Dubai’s economy built on sand?

Is Dubai’s economy built on sand?

Last week saw plenty of fear and lots of noise in the markets but little hard news as Dubai stayed on the front pages of the newspapers for its economical crisis. Holidays in the US (Thanksgiving) and Dubai meant that the financial market was startled for a few days before the scale of the problem became known; not a lot of information was available beyond the short statement from Sheikh Al-Maktoum. This, to my mind, simply fails to answer any of the questions the market is asking, so everyone will speculate about whether the request to re-schedule debt will succeed or lead to default, what other Dubai-based entities could suffer a similar fate, whether it could prove more widely contagious and which banks globally are most exposed. My first impressions of the Dubai crisis have not changed materially. I suspect this is an attempt at a managed, voluntary debt re-scheduling rather than a default. The sums involved are potentially large but are spread widely around the financial system if only because the Dubai ‘story’ was so heavily marketed and widely understood. There is a risk of ‘psychological contagion’ but Dubai was a one-off bubble. Nowhere else has there been so much extravagant construction. The longer-term damage is to the notion of an ‘assumed’ state guarantee. It was taken for granted that Dubai would stand behind its commercial enterprises and that Abu Dhabi would stand behind Dubai. Those kinds of assumptions are fairly reasonable to make when times are good, but in troubled times they are tested.

DWTC says: no matter how deep your pockets (or oil wells) are, throwing money at projects in a hope that it will ‘stick’ is somewhat akin to throwing cement in the sand in a hope that it will become a building. It may work but the chances are very very very slim, and you are going to need a lot more luck than money or cement in the long run.

 

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