Reality catches up with the Gulf’s model global city: It was almost a convincing show. The message to the City of London from Dubai was that the city-state had not only weathered the global economic crisis but was now destined to benefit as more financial groups escaped the high tax regimes and mounting regulatory restraints of more established centres.
That was two weeks ago. I was at a conference in London organised by the Dubai International Financial Centre, which bills itself as one of Dubai’s great achievements. Of course at the time no one in the room had an inkling of the storm that was about to be unleashed by the emirate – the demand for a delay in the debt payments of its flagship Dubai World, a move that sent jitters through global markets and sparked fears of a setback to the economic recovery.
Nor did participants know that the man who opened the conference – the well-respected Omar bin Sulaiman, head of the DIFC – would be sacked a few days later, without a hint of explanation. But then, this was only the most dramatic sign of a certain malady in the emirate – an alarming disconnect between the bubble of Dubai and the real world.
Today the city-state, which gave us Palm-shaped islands and indoor ski resorts, is a financial centre that cannot pay its debts. And it has the financial community – much of it, incidentally, with offices at the DIFC – up in arms, contending that it had been misled about the city’s debt management intentions.
Dubai has always marketed itself as a model of a global city, in a backward Arab region which has miserably failed to overcome its conflicts or meet the aspirations of its young population. The biography of its ambitious ruler – Sheikh Mohammed bin Rashid al-Maktoum – depicts a man with a mission to usher in no less than an Arab renaissance.
Yet Dubai has managed its finances with a combination of an autocratic state refusing to face reality and a secretive family company oblivious to the expectations and the workings of world markets.
If the global meltdown washed up on the Dubai shores this week, when other troubled cities are on their way to recovery, it is, at least in part, because it took the emirate so long to admit that it was in trouble.
Just over a year ago, when Lehman Brothers collapsed and world markets tumbled, the word in Dubai was that the emirate was too strong to be caught up in the turbulence.
In one of many surreal moments that followed the Lehman debacle, Nakheel, the debt-laden Dubai World developer at the centre of the storm, unveiled plans to build the tallest tower in Dubai. A competitor, of course, was already well on its way to completing the emirate’s tallest building. The new one, though, would soar above Burj Dubai, said Nakheel.
Officials insisted that Dubai knows how to take advantage of the misfortunes of others. We live in a violent and unstable environment, they would say, but that makes us a magnet for people and money fleeing other volatile spots. This is the Dubai model. This is the Dubai miracle.
In fact, it was probably officials’ fear of admitting to their boss the extent of the indebtedness of companies under their charge that delayed the reckoning.
Dubai eventually got over its denial – once it had counted its debts, which reached a massive $80bn, it was impossible not to. But it was not until February that it was helped out by Abu Dhabi, through a $10bn Dubai five-year bond issue to which the central bank of the federation, the United Arab Emirates, subscribed.
Why so long? Because the proud Sheikh Mohammed, it seems, was reluctant to be bailed out by his richer neighbour, possibly fearing it would put a damper on Dubai’s image and constrain its independence. Nor was he willing to part with some of Dubai’s crown jewels at distressed prices. Some people suspect that it is the same dogged resistance that has landed Dubai in this week’s mess.
Even after the February bond issue, officials in the emirate were coming up with all sorts of explanations for why it should not be defined as a “bail-out”.
Though the markets calmed down after the bail-out, it was not long before more confusion set in. In May one of the main people entrusted with steering the emirate out of the crisis – and one of the few who recognised the full scope of the challenge – was demoted.
Nasser al-Sheikh, the director-general of the finance department, seemed to have been a victim of a power struggle that intensified this year, as the head of the ruler’s court has sought to consolidate his own power, at the expense of aides who had been in favour during the boom years. It was not lost on some observers that while other competent people were being removed, Sultan bin Sulayem, the head of Dubai World, had been stripped of many of his powers, but is still at the helm of the company.
To be fair, Dubai’s plans to restructure its companies and put resources in the most viable assets might be sound. But given that details of any strategy are treated like a national secret, and that decision-making is wrapped up in palace intrigue, the city and now the rest of the world are left to operate on rumours and speculation rather than facts.
Perhaps none of this should surprise us. Dubai is a place where investors fell for trick advertising a few years ago that said the emirate would build a “bubble city”, a development of restaurants and museums suspended above ground by helium balloons and surrounded by a transparent enclosure.
This fantasy was never meant to get off the ground. But maybe it secretly did? And maybe that is where some of the decision-makers have been living.
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