The story of Dubai’s fall from grace is quite similar to what we see in the corporate world, where giant transactional corporations failed despite their enormous size. Dubai’s rulers harbor a delusion similar to that used by CEOs of failed companies: that they were too big to fail and that the ravages of time proved them wrong.
Visitors to the city confess that a blanket of gloom could be seen enveloping the Emirate for most of 2009 with empty ports, unfinished skyscrapers, empty shopping complexes outlining the story of a bursting bubble. The desperation is palpable as the carnage has exposed the overleveraged nature of Dubai’s economy. It became clear that Dubai is a classic example of a syndrome affecting emerging markets. The kind of hot money that swoops into an economy for the biggest returns and then disappears just as quickly at the slightest hint of a slowdown, a kind of malaise that afflicted the Asian tigers in the bloodbath years of 1997- 1998.
Dubai has suffered greatly from reckless speculation in property markets by its elite, who were used to buying and selling properties in a matter of weeks taking advantage of the free flow of mortgage money. Dubai was not only the recipient of foreign capital, but had also invested heavily in promising investment destinations around the world. But the interconnected nature of today’s global economy ensured that the carnage that hit financial markets in Europe and the United States reached the shores of Dubai. Rising oil prices had somewhat insulated Dubai from collapse, but not for long as global oil demand plummeted; sinking prices to an all-time low in a span of four months.
Gold prices fell as a result, further eroding investor confidence in the solvency of Dubai’s economy and its ability to meet its obligations. The vast majority of people became unemployed and migrant workers were sent back home. The resulting slowdown exposed the indebtedness of Dubai’s economy, which was $80 billion in debt on an asset base of nearly $350 billion. Foreign institutional investors panicked and began to reconsider their investments in the emirate, leading to major construction projects stalling in Dubai.
Somehow, the recession hasn’t diminished the appeal of this desert paradise among tourists. Millions of tourists even today visit online travel portals to search for cheap holidays in Dubai. Travel agents know that the Middle East remains their best option for customers looking for short-haul destinations and continue to offer cheap vacation deals to Dubai. However, as 2009 ended and 2010 began, you could see Dubai’s economy coming back to life with the share prices of most companies swinging higher.
The Economist’s hope that Dubai, in the coming months, will regain its economic power and recover as the “Land of Opportunity” that it once was.