Well, isn’t this embarrassing. Imagine if you owed $59 Billion, went to get your checkbook and found that you couldn’t even come close to making payments. What to do. . . what to do? Ask for a six-month moratorium from your creditors, of course!
Dubai is the most populous state of the United Arab Emirates (UAE), one of the one of the seven emirates (states), the others being: Abu Dhabi, Ajman, Fujairah, Ras al-Khaimah, Sharjah, and Umm al Quwain (but, you knew that). A map of the UAE looks like a raggedly slice of pie with all but Abu Dhabi, crowded into one corner. The whole of the UAE is located on the Southwest of the Arabian Peninsula, on the Persian Gulf, next-door to Oman on one side, and Saudi Arabia on the other.
Prior to 1971 the UAE was known as either Trucial Oman or the Trucial States, a reference to a truce made in the 19th Century between several Arab Sheikhs and the United Kingdom; still earlier, the area was called the Pirate Coast. Periods of British, Ottoman and Portuguese rule preceded. Dubai was called Al Wasl by British historians in the 1820’s.
And yes, did I mention oil? The UAE has the sixth largest oil reserves in the world, plus one of the most developed of all Middle Eastern economies. Measuring by per capita gross domestic product the UAE is one of the richest countries in the world, enjoying a whopping per capita GDP of US$54,607, for each man, woman and child living in the UAE (so says the IMF). It is tiny – a mere 77,700 square kilometers. Average life expectancy is highest in the Arab world, an incredible 78.24 years.
So, why can’t Dubai pay its debts? And what, if anything, does this mean for the troubled world economy and our own US ailing economy?
Well, Dubai had this incredible building boom over the last some years. Huge real estate development projects have included some of the world’s tallest skyscrapers and most massive projects, like the Emirates Towers (the 12th and 29th largest buildings in the world, connected by a huge shopping center, the Boulevard), the Burj Dubai (a needle-thin building, at 2,684 ft., tallest man-made structure in the world), the Palm Islands (fantastical artificial island complexes, including one photographed from space that looks like a palm tree), and the 2nd most expensive and tallest hotel in all the world, the Burj Al Arab (the one that looks like a giant sailing ship).
During the reign of Sheikh Zayed bin Sultan Al Nahyan, the UAE has modernized and liberalized the effects of Islamic law, establishing fairly solid civil and criminal courts which have accordingly diminished the role of the Sharia Courts. This opened the door to foreign investment, attracting banking and financial interests to what some called the Switzerland of the Middle East. Established in 2000, the Dubai Financial Market (DFM) was created to be a secondary market for trading foreign and local securities and bonds, with a 4th quarter 2006 trading volume of around 400 billion shares, (US$ 95 billion) and a market capitalization of around US$ 87 billion. For a peek into that world, see the DFM website.
Dubai’s real estate market boomed until a sharp 2008-9 downturn as the world’s economies went into crisis. When real estate boomed in Dubai, estimates were that its real estate was worth some $350 Billion – now, in the throes of economic turbulence, by February 2009, Dubai’s foreign debt was estimated to be approximately US$ 100 Billion. This means that each and every one of the UAE’s citizens is responsible for $400,000 US$ in debt – every man, woman and child.
We will not know the real effect on world markets from Dubai’s request for this six month moratorium on its debts until after the Thanksgiving holiday weekend, maybe not for months ahead yet, but, tongues of financial gurus are wagging wildly over this news tidbit. Just like consumers in the West, it seems that Dubai gorged itself on debt (think: how your stomach felt after your recent Thanksgiving repast), built and invested in far too much pricey real estate with that debt, and, now that their building boom has gone bust (like ours in the West), they are in an unprecedented crisis. Some expect Big Brother Abu Dhabi to bail out Dubai – The NYT quoted Paul Schulte, who heads strategic research for Nomura’s Hong Kong operations: “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”
Of course, when your real estate values are crashing and your debts have come due without funds to pay them, it does help to be sitting atop a giant pool of fossil fuel.