November 24, 2008 / 4:08 PM / 10 years ago

Financial crisis spells rethink for Dubai Inc

DUBAI (Reuters) - Dubai, the Gulf city that rose to fame with projects such as the world’s tallest tower may have to rethink its ‘bigger, bolder, brasher’ model as the global crisis bites giving central stage back to Abu Dhabi.

Early morning fog is seen in the Marina area of Dubai October 16, 2008. REUTERS/Steve Crisp

In the space of a decade, Dubai propelled itself from a desert backwater into the global limelight, attracting millions of sun-seeking expatriates and tourists with ambitious projects and tax-free shopping and living.

Meanwhile few people outside the Middle East had heard of Abu Dhabi, the capital of the United Arab Emirates federation and home to most of its crude oil reserves.

But the federal government’s move to rescue two Dubai-based Islamic mortgage lenders this week comes as the starkest sign yet that the heady boom years are over for the free-wheeling emirate widely dubbed as Dubai Inc — at least for now.

“There may be some schadenfreude on the Abu Dhabi side on one hand but on the other hand they don’t want to see Dubai fail,” said Eckart Woertz, economist at Gulf Research Center.

“That it is the federal government not the Dubai government that is doing this tells you something about the economic capabilities of the two emirates ... There will be a redistribution so the overall importance of Abu Dhabi in the federation will increase even more.”

The UAE federation was formed in 1971 after the termination of treaty relations Britain had held with the emirates of what was formerly known as the Trucial Coast.

The new federation’s two most powerful members were Dubai, a thriving port that had already established itself as regional entrepot, and Abu Dhabi, home to over 90 percent of the country’s oil and the major contributor to the federal budget.

Dubai had its own army well into the 1990s, when it merged it into the federal armed forces. One area in which individual emirates have been able to maintain autonomy is economic policy.

While the ruler of Dubai is UAE prime minister and plays a pivotal role in federal policy, when Dubai kicked off a Gulf Arab property boom in 2002 by first allowing freehold property ownership, it could do so without federal approval.

But analysts say the most serious financial crisis the UAE has faced in its short history could ironically end up strengthening the federation as its seven members, once jealous defensive of their independence, pull together to weather the storm.

“You may see Dubai’s wings clipped somewhat but the UAE could become stronger as a result. Maybe that is the silver lining to this cloud,” said Durham University’s Christopher Davidson, author of two books on the UAE, the world’s fifth-largest oil exporter.

“You might see a resurrection of the UAE brand.”

PICKING UP THE PIECES

Speculation has mounted for weeks that Abu Dhabi had quietly stepped in to prop up troubled Dubai firms or meet debts as the global financial crisis has hit Gulf Arab stock markets and put an end to the property boom.

Dubai executive council member Mohamed Alabbar strenuously denied on Monday that the emirate was in any talks to receive financial aid from the federal government and said it had received no offers for major Dubai government-owned assets such as Nakheel properties and Emirates airlines.

Yet unlike other Gulf Arab oil-exporters that built their infrastructure development projects on petrodollars from six years of soaring crude oil prices, Dubai is leveraged.

Alabbar said the government now owed $10 billion and state-affiliated firms $70 billion, which it could pay, but a tightening of mortgage lending, freezing of liquidity and real estate slowdown has made life harder for Dubai.

“There is a fine line whether we are discussing federal or local ... it’s almost the same. It is difficult to separate,” Alabbar told reporters in Dubai. “All this behavior indicates this is just one country.”

And it is not just Dubai that could begin to move further into the federal fold. Analysts say that if Dubai is suffering, smaller UAE emirates — Ras al-Khaimah, Ajman, Umm al-Quwain, Sharjah and Fujairah — may also benefit from a collective effort to weather the crisis.

For now, Alabbar said Dubai was “rationalizing our expenditure and our consolidating activities” and could pull back on the properties it plans to bring to a market that has become accustomed to spectacular projects, from a man-made archipelago in the shape of a world map to a kilometer-high tower announced in the midst of the financial crisis.

“Is Dubai sustainable in a downsized form? The boom was partly dependent on maintaining the momentum and keeping more people and more investment coming,” said Woertz.

“But Dubai has created a kind of trading hub. Look at Hong Kong, it saw very violent crashes in the past and it is alive and kicking. It is a very serious situation we are in. Having said that it is not all doom and gloom. Maybe in three or four years Dubai can pick up the pieces.”

Additional reporting by John Irish, Editing by Chris Wickham

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