The Persian Gulf October 8, 2009, 1:20PM EST

Dubai: Is the Worst Over?

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Once Dubai's leadership got their hands on the $10 billion loan from Abu Dhabi last summer, they seemed to have become less serious about working out debt and restructuring their companies. The loan was supposed to have been just the first tranche of a $20 billion fund raising, but the source for the remaining $10 billion is unclear; capital markets don't seem to be an option. In the end, the rest is likely to come from Abu Dhabi, the wealthiest emirate in the United Arab Emirates and Dubai's biggest backer. But the two sides are struggling to reach a deal. One theory has it that Abu Dhabi is asking Dubai to put up collateral in the form of stakes in one or more of its crown jewel companies, Dubai Aluminum, Emirates Airline, and harbor operator Dubai Ports World. A possible solution: A loan could be structured like a mortgage, with Dubai regaining its equity if and when it pays off its debts.

A Respite from Congestion

Now that markets have improved, some of the foreign investments Dubai made in frothy 2006 and 2007 are beginning to regain value. But businessmen say Dubai's debt situation makes banks reluctant to lend to anyone there.

To be sure, people in Dubai are no slouches when it comes to making lemonade out of lemons. Even with the recent declines, the gleaming city they've created on what was once a patch of windblown sand is quite an achievement. One now hears around town that Dubai will benefit from this enforced breather because its infrastructure had fallen badly behind its ambitions and population growth. A combination of new roads and thinned traffic has reduced congestion, which had become a serious problem. And a new Metro, long a subject of skeptical comment, now offers partial service, with trains running up and down Sheikh Zayed Road in the financial district.

Still, some strains to the infrastructure remain visible. For instance, Dubai's long, narrow harbor—known as the Creek—has recently been the scene of massive fish die-offs. The local press has speculated that the cause is an overloaded sewer plant dumping insufficiently treated sewage in the water.

Publicly, at least, Dubai's leaders still put on a brave face. Alabbar, who is delivering on huge projects such as the Burj but has seen Emaar's U.S. arm file for bankruptcy, said that in hindsight he might have been "more cautious." But he doesn't think Dubai's strategy of being a hub for "1.5 billion people" in the Middle East, Asia, and Africa needs revising. "No one can do what Dubai did," he says. "Even more so now."

Reed is London bureau chief for BusinessWeek.