Dubai Debt Shock Sends Markets Reeling

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For Dubai itself, the money may prove to be the least of the problem. Until now, the Dubai experiment began in the 1950s by Sheikh Rashid, the father of the current ruler, has been an incredible success story. The revenues from the state's minimal oil revenues were initially used to turn it into a major regional trading hub and before long most of all the goods flowing into the Arabian peninsula were going through Dubai. When Sheikh Mohamed, the present incumbent, decided to take the scheme a step further and turn the city into a financial centre and global tourist destination, Dubai hit the big league.

Vast amounts of money were spent on property, infrastructure and tax breaks to turn it into the playground of the rich and famous. Such was its success in luring buyers from around that world that between 2003 and 2007 property prices in some parts of the city quadrupled. There seemed to be no limit to the luxury: the opening night of the Palm Island's Atlantis Hotel cost a whopping $20m and included a set from Kylie Minogue and $1m of fireworks.

But the key to the metamorphosis was image, and all the growth was built on debt. "Brand Dubai is not just sun, sea, sand and luxury, it is that everything is possible, the sky is the limit," Professor Gerd Nonneman, a Middle East expert at Exeter University said. "It was a cycle: the brand brought in buyers, which pushed up prices further."

By the end of last year, with property prices slumping by up to 70 per cent, development stalled, plans for the third Palm Island were scaled back, plans for a tower a mile high were cancelled, and more than 400 projects with a total value topping $300bn were put on ice.

On the ground, the congestion which plagued the city has eased as tens of thousands quit after losing their lucrative jobs. The bars in Dubai's luxury hotels still buzz with weekend revellers, but the teeming crowds which once flocked to popular nightspots such as Left Bank in the sprawling Madinat Jumeirah hotel complex have become noticeable by their absence. The property sector, once the lifeblood of the Dubai expatriate workforce, is now shattered, with thousands laid off. Architects, estate agents and construction staff have vanished after building projects ground to a halt. Dubizzle, a local website similar to eBay, has been flooded with adverts from people selling.

But a charm offensive from Sheikh Mohamed had just about held world opinion together. And even this time, Abu Dhabi will not let Dubai drown. "Though there is rivalry between the two ruling families, is it important for Abu Dhabi that people in the outside world don't get the impression that the UAE is a busted flush," Professor Nonneman said. The balance of power in the UAE must shift as Abu Dhabi extracts what political capital it can from its injections of cash he thinks. And the debacle will tarnish the gilded image that was the bedrock of Dubai's success. "It has taken decades to build up 'Brand Dubai' and this is a spectacular blow."

Additional reporting, Ed Alexander, Dubai

Provided by The Independent—from London, for Independent minds

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