Le Monde: Dubai's Broken Dreams

The Gulf countries are poster children for the 'contradictions of capitalism.' The financial crisis that laid bare the system's inadequacies for all to see have hit these countries especially hard:

Few experts warned this wealth was not real but virtual´; Dubai’s broken dreams

Samir Aita

January 2009

The Gulf States were expecting a “correction” in the housing market (1); what surprised them was its scale. Local stock markets fell by 50% in six months – and 70% in Dubai, the new wonder of neoliberal capitalism (2). On 20 November, as a huge display of fireworks and Hollywood A-listers heralded the opening of the lavish new Atlantis Hotel, thousands of Asian workers were being bussed off Dubai’s construction sites and out of town.

A legal judgment in a case brought by small savers led to the closure of the Kuwait stock exchange from 14-17 November. In Dubai, property sales collapsed (3). Companies like Nakheel, Emaar, Damac and Omniyat, which have been developing massive skyscrapers and ecological islands, announced lay-offs and suspended new projects.

The director of global banking at the influential British bank HSBC wondered if the landing would be soft or hard, even in ultra-rich Qatar, and speculated that now might be the time to introduce more market regulation and more rigorous risk-management (4).

The US financial services company Citigroup was more forthright. Its expert Mushtaq Khan recently announced that the Dubai dream might be over (5). He said: “Dubai’s two specific concerns are its real-estate sector and how it will refinance the debt it has built up in recent years.” The emirate has borrowed to fund housing projects and foreign acquisitions. The subject is so sensitive that Citigroup’s chairman, Winfried Bischoff, recently met the emir of Dubai, Muhammad bin Rashid al-Maktum (6). Off the record, one banker said: “We haven’t reached the bottom. My holidays in December were cancelled, even though it’s a matter of only seven working days. As far as we’re concerned now, ‘long term’ means three months. We’re desperate for liquidity and have repossessed properties, but the authorities won’t let us put them on the market.”

Although the workings of the Gulf bubble differ from the United States, all the ingredients are there. Supply constriction has caused dizzying inflation (more than 400% in five years). Most mortgages were issued directly by property development companies (rather than through banks), without proper assessment of client risk. Investment was highly leveraged; developers, constructors, managers and sovereign wealth funds all took out huge loans; and risks were spread across derivative products, both conventional and Islamic. In anticipation of a frenzy of future projects, the sector paid inflated prices for construction materials and even – in an attempt to circumvent administrative delays – for manpower.

The whole edifice was predicated upon a continuing rise in the prices of property, raw materials and oil. But everything collapsed, leaving uncertainties about the losses suffered by the sovereign wealth funds and about how much they have borrowed against future receipts.

Meanwhile, Gulf Bank of Kuwait, the country’s second largest, collapsed after massive losses on the foreign exchange market. At a public debate in Qatar, televised by the BBC, the motion that “Gulf Arabs value profit over people” was supported by 75% to 25%, and Mansoor al-Jamri, the editor of Bahrain’s daily Alwasat newspaper, was loudly applauded when he accused the Gulf states of buying their people’s silence through state hand-outs. “I am always hearing in the media and from officials how this is not the right time for the participation of the people. They say, ‘we will give you free education and free housing, but just shut up and don’t criticise.’ The governments have a philosophy based on oil wealth, but instead of letting it trickle down to the people, they use it to silence the elite or bypass their citizens” (7).

Samir Aita is an economist and chairman of A Concept mafhoum

(1) Soren Billing, “Dubai real estate correction ‘very close’”, 28 September 2008.

(2) See Akram Belkaïd, “Fantasy cities for a future that might not come”, Le Monde diplomatique, English edition, August 2008.

(3) Dylan Bowman, “Half of Dubai agents sold no homes in last month”, 17 November 2008.

(4) At the Financial Leaders Forum, Doha, 16-17 November 2008.

(5) Camilla Hall, “‘Dubai dream’ May Be Over on Lower Oil Price, Citigroup Says”, 18 November 2008.

(6) Gulf News, Dubai, 19 November 2008.