I wonder if many people, as I did, assumed all this was being built with petro dollars. That is petro turned into cash, turned into real estate.
Turns out they used just a "little" debt as well.
Too bad no one told them, capital is scarce. :)
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7 comments:
Perhaps a little reckless ambition, but how many western leaders do you know that feel safe driving themselves around?
None. Maybe Ralph, although he needed a driver for another reason.
Dubai has had no hydrocarbon revenue worth mentioning for about 4-5 years now. So a new source of significant revenue came from selling plots of desert land at 100-200 dollars a square foot and investing the proceeds in semi state companies that become giant developers here selling properties at crazy prices. All this began around 2000-1. There was a true real estate bubble here and Dubai consequently took its gains and used them to gain further massive leverage from banks and the financial markets to finance investments overseas. Investments in stock exchanges, real estate, companies, etc.
"A little reckless amibition" is correct, but which major city wasn't that way early in its history. Look at Hong Kong, Shanghai, Singapore. They all made mistakes and have been around longer than Dubai.
Dubai's ruling family are quintessential visionaries in the sense that they think decades ahead. The ruler's father took a very big risk in the late 60's taking out international loans to finance the development of a deepwater port that changed Dubai forever. Dubai almost went bankrupt back then but had hydrocarbon revenue to fall back on.
Nowadays this is a major regional urban center that Middle Easterners, Indians, Pakistanis, Iranians and ex Soviets want to live and invest in. That's just the way it is. It is a major services hub for a hydrocarbon economy bloc of countries. It is the trade gateway to Iran. The city has been developed just enough to generate significant revenue, that along with Abu Dhabi's help, will allow it to get through this financial crisis.
Yes mistakes were made, and inhabitants like me don't agree with everything the Ruler has planned and done for Dubai, but this is far from a dead or dying city, and anyone who has been to the Middle East and the Subcontinent knows that. The real estate crash has made a huge chunk of Dubai GDP disappear so it will be slow growth for several years, but this place attracts capital because it is a true mecca. People who don't know the region cannot understand that.
Now, compare Dubai to another credit crunch victim, Ireland. Ireland is absolutely dead and with no hope of recovering sharply for at least a decade or two.
Thanks for the info Khalid. Does the govt report annual income expenses for the year?
Are they running balanced budgets or deficits like everyone else?
You may have awakened the Exceptional Irish Trader with your Ireland projection.
I agree Khalid. Dubai will come out fine. 60 billion in the grand scheme isn't really that much. They'll get through, especially with Abu Dhabi and Saudi Arabia close by.
I think the bigger impact will be had from people now taking a second look at the safety of "sovereign" debt.
[had some problems with blogger comments earlier, you can erase previous attempt if it came thru. thnx]
This year I am pretty sure Dubai gov is running a budget deficit. I wouldn't fully trust or rely on what the government reports as income and expenses because the nature of an autocratic government means things will always be opaque here. That's going to have to change, moving forward, for sure.
Note I said no hope of "recovering sharply" in Ireland. I think the real estate market will be dead in Dubai for at least a decade but business activity will pick up very sharply relative to elsewhere even if Dubai is not bailed out and does go bankrupt (very very unlikely scenario) because of the regional perception of this city. It is likely to keep on attracting people and capital even if at a much slower rate. One last thing: It is unclear if the ruling family are really unable at least to bail out partially the Dubai gov themselves using their own personal wealth. But they have always been shrewd business people (the recent Lehman-type debt binge notwithstanding), and would always opt to use other people's money to finance development as they have done since the early sixties.
Dubai and the UAE will emerge from this phase with more experience and wisdom, and with better rules and regulations and rights for foreign investors and residents in this part of the world.
It is critical to understand that Dubai especially, and the UAE generally are the only places that are business friendly and reliable and transparent in this part of the world comparable in some way to Singapore and HK.
My main point is that Dubai will likely be around to play a major role increasingly in any economic and financial power shift from the West to the East (China).
At least I hope so...
I think you're right Khalid, Dubai will survive and prosper. I hope there are no financial reporting issues / surprises that arise later.
Dubai is a fascinating country and the world will be watching to see how this all plays out.
Do me favor and remind everyone that capital should always be treated as scarce, even when it isn't. :)
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