Bye Bye, Dubai?

The emirate is down. But the flamboyant city will be back—the world’s energy needs aren’t going away anytime soon.

The Burj al-Arab (Tower of the Arabs) stands over one thousand feet tall offshore, built to resemble the sail of an Arab dhow. It claims to be the world's only seven-star hotel. The Royal Suite fetches roughly $28,000 a night. Further towards the center of the city, Burj Dubai, the world's tallest building, is in its finishing stages, though whether it will have a full compliment of tenants is another matter. Two huge shopping areas, the Mall of the Emirates and the Dubai Mall, boast respectively the world's largest indoor downhill ski slope and the world's largest single tank aquarium filled with sharks, stingrays and other heavenly creatures. The new Metro system, though incomplete, opened with great flourish in September. The Dubai Air Show in November attracted prestigious international customers. The much-hyped sports season is underway, culminating in the Dubai Racing Classic, the world's most valuable horse race.

The property market, however, has crashed. Four of the five artificial offshore islands that were being created to house homes for millionaires remain in the planning stage. Dubai is wallowing in debt. The crisis began in 2008 when the property bubble burst and the cranes stopped operating. It received another shock on November 26 when Dubai World, a huge holding company, announced that it was postponing a $3.5 billion debt repayment due in December for six months. Unlike its Emirate cousin Abu Dhabi, Dubai has been built on debt, not cash, having long ago depleted its meager oil reserves. If Dubai is to survive, Abu Dhabi's assistance will be needed, but it will come at a price. Invariably Abu Dhabi will want to curb some of the more excessive exuberance displayed by Dubai's flamboyant ruler Sheikh Mohammed bin Rashid Al Maktoum, who had ambitions to make Dubai not only an international hub, but a financial and tourist center comparable to Hong Kong and Singapore. Emirates Airlines, he hoped, would become the largest in the world. But now it is possible that Emirates Airlines will have to be transferred to Abu Dhabi as payment.

Although the crisis is a necessary correction to Dubai's excesses, it is premature to write off the city as a huge white elephant. Its geography and infrastructure, especially its air and sea ports, are modern and Emirates Airlines has been making a profit. Its mega sports events will probably continue to flourish and attract the very rich, but the season for such activities is very short, three to four months at a maximum. The rest of the year is so unbearably hot that everything has to take place indoors, creating phenomenal electricity bills for air conditioning. In fact, the electricity demand for all the modern and expanding cities of the Gulf is so high that the development of nuclear power for electricity generation really does make sense. The other commodity in short supply is fresh water; hence desalination has become a necessary of the development process. Even if there had been no credit crisis in 2008, Dubai is in competition with Abu Dhabi, Doha, Kuwait City and Bahrain, all of which aspire to be major international hubs and tourist centers. There is no way all five can make profit, and therefore some restructuring of their business plans is inevitable.

The repercussions of the Dubai crisis go beyond the Gulf. British banks, for instance, have loaned Dubai a great deal of money, and the precarious nature of Dubai World has financial gurus worried about the debt exposure of some European countries, including Ireland, Spain, Greece and the Baltic states. If the construction boom slows down throughout the Gulf, many expatriate workers from South Asia will have to return home without the remittances that their families rely on, so there will be a fallout in India, Pakistan, Bangladesh and the Philippines. But assuming oil prices remain relatively high and the global recession eventually ends, demand for Gulf oil and natural gas will grow to meet the huge energy needs of China, India, Korea and Japan. This means that more money will come into the Gulf and undoubtedly Dubai will find a way to rescue itself from its current dilemma. The projects will be downgraded and the exuberance will be put on hold, but don't expect these new flamboyant city states to go away any time soon.

 

Geoffrey Kemp, director of regional strategic programs at the Nixon Center, was in Dubai in November, jointly hosting a workshop on China's role in the Middle East with the Gulf Research Center.