Wednesday, October 22, 2008

Does Wall Street's bust threaten Dubai's boom?

Dubai and its real estate market are vulnerable to an international economic downturn, especially compared with many of its Gulf neighbors. As the region's premier business, transportation and tourism hub, it is by definition more entwined with the global economy. And in tight times, Dubai lacks the windfall oil profits that have enabled sister emirate Abu Dhabi, for example, to amass a financial cushion in sovereign wealth funds totaling hundreds of billions of dollars.

But Dubai's biggest risk is its daring reliance on debt to drive its breathtaking building boom. Last week, Moody's estimated that in 2006, the most recent year for figures, Dubai's government and public-sector company debt was at least $47 billion, a staggering 103% of GDP.
Even before the global crunch, banks in the United Arab Emirates (UAE) were being hit this year by an outrunning stampede of billions of UAE dirhams — so-called hot money that one report valued at $55 billion — led by speculators giving up on hopes that the country would de-peg its currency from the U.S. dollar.
An underlying reason for the relative lack of panic so far is that Dubai real estate remains a financial haven for wealthy individuals from riskier nearby countries like Iran and Pakistan.
In the event of a systemic threat, Dubai can probably rely on super-rich Abu Dhabi for a bailout.
Sometimes bailouts are done out of pity, such as for flood victims. Even if those victims willfully chose to live in a flood plain and did so because they knew they'd be bailed out since those around them would take pity on them.

My thinking is it wouldn't be pity that would motivate a bailout of Dubai. And if it is not pity, then it would have to be self interest. The question then is, why would it be in Abu Dhabi's self interest to bailout its rival? The answer may be that it would gain some de facto control over Dubai, Inc. Or it could be that it would do so to prevent another party -- e.g., Saudi Arabian investors -- from bailing out Dubai and gaining influence there. Or it could be to arrest the spread of an adverse financial contagion.

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