The tiny middle-eastern country of Dubai is going through a crisis that would be considered much more high profile if it weren't for the panoply of problems the rest of world is wrestling. It's investment arm, Dubai World, borrowed BILLIONS in the development of the world's largest office complex and resort, in an attempt to rival Las Vegas and Atlantic City. Dubai, not oil-rich, is one of the seven states comprising the United Arab Emirates (UAE).
Dubai World is an investment company that manages and supervises a portfolio of businesses and projects for the Dubai government. Its projects reach across a wide variety of industry segments and projects that promote Dubai as a hub for commerce and trading.
Dubai World is the Emirate's flag bearer in global investments and has a central role in the direction of Dubai's economy. Assets include DP World, which caused a storm when trying to take over six US ports. Nakheel, its property arm built The Palm Islands, The World Developments and Istithmar World, its investment company. It is chaired by Sultan Ahmed bin Sulayem.
The country's ambitious plans went terribly wrong in late 2009. Dubai World proposed to delay repayment of its debt, which raised the risk of the largest government default since the Argentine debt restructuring in 2001. Dubai World, the investment vehicle for the Emirate, asked for a six month payment delay on $26 billion of debt. The extent of the debt rattled markets causing many indices to drop - including oil prices. Since then, estimates of the amounts owed have jumped markedly.
The genesis of the crisis is the country's bursting real-estate bubble, which has caused all development to come to a grinding halt and the worldwile economic problems, which also have reduced tourism. Half of all the UAE's construction projects, totalling $582 billion, have either been put on hold or cancelled, leaving a trail of half-built towers on the outskirts of the city stretching into the desert.
Among the casualties is the tower Donald Trump promised would be "the ultimate in luxury", a $100 billion resort complex by the beach, and four huge theme parks and an artificial island developed by the state company Nakheel.
Banks have stopped lending and the stock market has plunged 70%. Look beneath the surface of the fashion parades and VIP parties, and the evidence of economic slowdown are obvious. Luxury hotels are three-quarters empty. Shopkeepers in newly-built malls are reporting a drop in sales. In Dubai you expect to see a Ferrari parked beside a Rolls-Royce. But not, as is the case now, with "For Sale" signs taped to the windows.
Under Dubai's strict legal code, defaulting on debt or bouncing a check, is punishable with jail, also known as "debtor's prison". Any expatriate in financial difficulty knows the safest bet is to take the next outbound flight.
Dubai, which has barely a trickle of oil in comparison with neighbor Abu Dhabi, is projecting a 42% increase in public spending on infrastructure projects, to compensate for vanishing private investment. But it cannot go it alone. Abu Dhabi is increasingly expected to bail out its poorer neighbour, and the two ruling families are meeting regularly to decide how to transfer cash into Dubai's ailing economy.
But Abu Dhabi has its own problems. The Emirate's sovereign wealth fund – once said to be worth $1 trillion – has taken a hit in the global recession, while the lifeblood of the economy – the price of oil – is down more than 60%.
The amount of debt owed by Dubai to the rest of the world is unclear. Guestimates have it at more than $100 billion, which could place the tiny country as the largest sovereign debt defaulter in history!
With all the problems facing planet Earth, the Dubai problem is merely another straw in the desert country's "camel's back".
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