Terry Murden: Dubai looks to have overreached for the stars

Published on Thursday 26 November 2009 20:54

THE closure of New York's stock exchange yesterday for the Thanksgiving holiday and the Middle Eastern markets because of a major Islamic feast left Europe at the mercy of traders, who delivered a severe blow to bourses across the continent on the back of the evolving debt crisis in Dubai.

Markets were pummelled after the city-state asked for a six-month reprieve to pay off a mountain of debt run up during a decade of explosive growth.

Among the worst stocks affected were the banks, including Barclays and Royal Bank of Scotland, though they played down the extent of their exposure.

Investors nonetheless want to hear that the crisis is manageable and won't spread, but the signs are far from encouraging. Dozens of projects have been halted and there has been an exodus of ex-patriate workers.

Two months ago Dubai's ruler, Sheik Mohammed bin Rashid al-Maktoum, played down concerns over the city's liquidity and claims that it had grown too fast during the good times.

In a rare meeting with the media he said the region was "all right". But as much as $80 billion is due to banks, investment houses and outside development contractors and those connected to the region fear huge damage may have been done to its reputation as a location for investors and developers. It may also spread to other parts of the United Arab Emirates.

So far, the announcements emerging have been vague and difficult to evaluate, leaving the markets uncertain and nervous.

The six-month request may have come as a surprise, but there were some early warning signs of trouble brewing. In February, Dubai raised $10bn in a bond sale to the United Arab Emirates central bank based in Abu Dhabi. It was seen as a bailout and helped keep the wolves at bay. Another $5bn was raised in a bond sale earlier this week.

Dubai created an image and a location that would appeal to the fabulously wealthy and famous, including actors Brad Pitt and Angelina Jolie, who have a residence there. It has staged world sporting events and its buildings aim to be taller than the grandest anywhere else on the planet.

But it is paying the price for trying to outdo its more conservative neighbour. Abu Dhabi's ruling Al Nahyan family has been investing its oil profits into infrastructure, culture and state institutions. Dubai pushed ahead with massive skyscraper projects and tourism plans, but some appeared to be based on grandiose gestures rather than realistic objectives.

Of those that have made it into bricks and mortar, the 2,600ft Burj Dubai will open in January as the world's tallest building. Other projects intended to complement it, including one to build a tower even taller, may fail to get off the drawing board.

The crisis is now turning into a bloodbath as senior figures have been replaced by Sheik Mohammed. The head of Dubai World, Sultan Ahmed bin Sulayem, has gone. Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and many other projects, has also gone.

But Mohammed's decision to put his relatives into positions previously held by those who built Dubai may backfire. Replacing over-ambitious businessmen with members of the ruling family will not play out well on the international stage.

Its best hope lies in Abu Dhabi which knows that the whole UAE has much to lose by allowing Dubai's problems to persist.

Chapter ends

THE sad plight of the nation's bookshops was brought into sharp relief last night when Borders finally succumbed to a battle it had been fighting for some days.

Anyone joining the crush in the run-up to Christmas will be surprised by what has happened, but bookshops cannot survive on festive gifts alone.

The firm's plunge into administration follows a long struggle with cash flow. Sales have been falling and stock levels hit as suppliers and credit insurers grew became agitated at the company's weakening position.

This is another business that is waging an almost unstoppable war with the supermarkets and the internet. It is a sad fact that bookshops are disappearing from the high street like winter snow in a heatwave and according to insolvency experts they won't be alone in the new year.