Dubai announced last Wednesday that it would ask creditors of Dubai World, the conglomerate behind its rapid expansion (it built the world’s tallest building), and Nakheel, the builder of its palm-shaped islands, to agree to freeze debt repayments for six months.
Some commentators are of the view that banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its $59 billion debt. Duabi’s total debt stands at $80 billion. If creditors were to reject proposals to postpone debt repayments for six months, the Dubai government could be forced to hold a fire sale of its international real estate assets.
Analysts however are of the view that other emirates of the UAE – United Arab Emirates -such as Abu Dhabi are unlikely to be affected by Dubai’s crisis significantly since their funding is derived from exporting oil and gas.
The key factor behind the crisis is the boom-bust policy of the UAE central bank. After closing at 4% in October 2006 the yearly rate of growth of the central bank’s balance sheet (the pace of monetary pumping) climbed to 177% by December 2007. In response to this pumping the yearly rate of growth of UAE’s monetary measure AMS jumped from 6% in October 2006 to 62% by April 2008. This massive pumping has given support to various activities that without the money pumping wouldn’t have emerged. In short these activities cannot stand on their own feet without support from monetary pumping.
Since January 2008 the pace of pumping by the central bank has been trending down. In January this year the yearly rate of growth of the central bank’s balance sheet plunged to minus 36.5%. As a result the yearly rate of growth of money supply fell to minus 12.5% by July this year. It is the fall in monetary pumping that is currently putting pressure on various activities that sprang up on the back of previous massive monetary pumping.
We suggest that other emirates are unlikely to escape the effects of the boom-bust policies of the central bank. Also, in other emirates loose monetary policy set the platform for new activities and the expansion of existing activities. As a result of a decline in monetary pumping by the central bank these activities are currently also under pressure.
Conclusion
A possible debt default by Dubai’s two large government sponsored conglomerates sparked worries in financial markets of another round of global economic turmoil. Dubai has requested a freeze on payments of some of its $80 billion debt for six months. We suggest that the key factor behind the crisis in Dubai is the classical boom-bust policies of the UAE central bank. The phenomenal expansion in various structures in Dubai was mostly on account of massive monetary pumping. Thus in December 2007 the yearly rate of growth of the central bank’s balance sheet stood at 177%. The bursting of the bubble came on account of the strong fall in money pumping. Since January 2008 the pace of pumping by the central bank has been trending down. In January this year the yearly rate of growth of the central bank balance sheet had plunged to minus 36.5%.
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My wife and I heard about this while driving on Saturday.
Her reaction (being disinterested in economics generally) was, “How can they have a crisis. Don’t they export oil?”
It was hard not to laugh. “Yes, but they also have a central bank, and central banks can destroy anything and do.”
Interesting enough, Dubai state considers letting that enterprise fail if it will:
Bloomberg: Dubai World’s Debt Not Guaranteed by Government
via Market-Ticker: My God, There Is A Wise Govermment
Curt Howland: Dubai is not really a big oil exporter, oil and gas exports make up just a fraction of the country’s GDP.
Hi i have been following mises.org for several months now and I think it is a very good source of information to explain the world we are in now.
On this Dubai crisis, may anyone enlighten me as to why even if there are cheap dollars out there (where investors are doing dollar carry trade), that Dubai is not able to borrow and solve this problem?
One more case adding to the history of Central Banks bubbleeconomics.
Question is, who’s been selling CDSes on them?
More importantly, who’s been buying them?
This happens because of bad management,There were no proper plan for what if something goes wrong,If they planned properly for sure they might have got some space to solve now for sure they will be forced to sell the property without profit even in loss may be BIG LOSS.
Well its an international crisis! it hit america 10 times as bad as it hit dubai. The differnce America has the largest economy in the world.. effects are less noticed in America.. thats the differnce
In fact ; the huge jump in money supply was the reason of the un believable growth .
But not becaus of the Central Bank injections , mainly becasue of the hot money from the global banks , investors and speculators.
The Central Bank in UAE is not from the type that involve in dynamic monetary managment.
The size of total inflows to the country as IMF in years 2005-2007 was arround US$ 68 Billion ( FDIs , …etc), the outflows between 6/2008-6/2009 total was US$54 Billion !
further to rh’s comments, see steve saville on dubai and the usd peg:
http://safehaven.com/article-15218.htm
Dubai can face these crisis because of its oil, but its needs well management and to consider future certianties.
Agree with RH the main reason is because overseas investors had to bring money back home, mainly from Russia and India. This has left the market temporarily dry of cash and caused the halt in the real estate market. Again this is temporary, the money invested in real estate cant really be moved elsewhere and the economic activity is not really that much effected. I estimate the situation will return back to normal in 6 – 9 months.
When Greed takes over, many things can go wildly wrong. In this instance (DD – Dubai Debacle) overtrading and over-borrowing are the causes and effects which results in this DD.
Vanity also plays a role in this DD.
At the end of the day, progress cannot be promoted through greed and vanity, but through overall deligent planning and through own financial and technical capacity in hand. Let this be a lesson to the rest of the Arab world.Co-operation and not Competition should be the Key Word.
…and the lion shall lie down with the lamb.
بدي اقتراحااات لهادي الازمه و في اسباب كتيررررررره ايش هاد علي بحث اناااا ووو و ليش اثرة ازمة دبي على الاسواق الاوروبيه و العالميه اففف والله مش فاهمه اشي
Biggest problem now Dubai is facing there Justis system as and it will take lots of time to come out
It was bad news. But dubai is very rich city due to Oil exports. Let’s see what happens in future. God bless Dubai.
Dubai should vanish.I am praying for that
when I was there I noticed that poor(low class) being exploited & rich remain poor.even the govt is not encoded to a rule to solve it.even the governments closing the eyes to employees(low class) and showing favoritism towards the enterpriser.even if any wrong is with employers govt supports employer.this type of attitude should change by the govt.
poor foreign workers, whose passports are seized by their employers, and who may not see their contract honoured, are a shameful dark side to the dubai story. this injustice should vanish.
Once Dubai was a hub great shopping and was known for it’s richness. It’s sad that it fell into a critical time with it’s finances. The Central bank’s policies should have been reviewed beforehand, to avoid the present situations.
You mean, nobody came? Nice pics.
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