A Tsunami in a secure water way (The Persian Gulf) is the last thing Sheikh Mohammed bin Rashid, a visionary who wanted to transform Dubai into an open economy and a world hub for investments, has expected. Even though the geographical location of the gulf is secure from catastrophic natural disasters like hurricanes and Tsunamis, but the area was prone to a financial/economic disaster. No one expected that it had a far more chance of being hit by an economic storm than a sand storm. This is essentially what happened the week of Thanksgiving, a financial Tsunami that started in this region traveled at a rapid pace and the effects were felt across all the major economies on the planet.
Dubai is one of the seven emirates in United Arab Emirates. It does not have high oil reserves like its neighbours and other emirates, Abu Dhabi being the largest contributors. To offset this lack of 'liquid gold' reserves, the Dubai Sheikh - Mohammed bin Rashid came up with a grand plan, he wanted Dubai to be the next Hong Kong or Singapore and transform it into an open market luring investors from all across the globe. His grand vision included building tallest building in the world to man-made islands off the Persian gulf. It needed a magnanimous effort and investments to make this a reality. Dubai World- a conglomerate of state owned companies was formed which included 'DP World' (which owns 49 ports across the globe), property developers to investment firms. This conglomerate owned several large investments across the globe including the 'City Center' in Las Vegas. It is the largest private investment in a construction project so far. This massive project has casinos, hotels, resorts and theatres built in a 67 acre land on the Las Vegas strip. It has over 6000 rooms and just to keep up with the occupancy rates is itself a humongous task. Vegas is already struggling with falling property values and deepening economic woes, the City Center needs throw away deals to attract guests.
The idea of an open market, lavish constructions and man-made islands was quite unique and never heard off before, but it was unfortunately taken up at the peak of the credit boom. Little did the Sheikh expect that it was the peak and the markets were going to crash right after that. These state-of-the art construction projects have certainly attracted a lot of global investors into the area. Close to $100 billion was pumped into Dubai and more than 30% went into Dubai World for their projects. There was an undisclosed, implicit support from the Sovereign group (the royal family) on this conglomerate that these investments were protected. Lenders didn't cross the blurry line till the first announcement came out a couple of weeks ago. Just the fact that none of the creditors knew the underlying shaky structure till the news came out public, was alarming. Dubai World was in talks with its creditors to restructure a massive $26 billion debt, which the government said it may not back up. As one of the economical analysts put it -"It is too big to fail and too big to gaurantee".
What is even more interesting was to notice its neighbor (Abu Dhabi) who is closely watching the fall out. Being the richest of the Emirates and sitting on a $650 billion Sovereign wealth fund, it is not difficult for Abu Dhabi to quickly bail Dubai out of this situation but it is waiting to see how desperate the situation gets and how much of collateral it can swallow from Dubai in exchange. The first major hurdle was a payment that came up due on Dec 14 for $3.5 billion, it was miraculously pulled off but it will be very interesting to see how Dubai gets out of this situation.
There were some interesting discussions if India should rescue Dubai. Granted there are scores of Indian workers and their families who are directly effected by this turmoil, is it a good idea to get involved when Dubai's neighbors are not extending a hand? India is certainly in a good financial situation with about $285 billion in reserves and is capable of attempting such a rescue but it may not be that great of an idea. Primary reason - Dubai World is still a privately owned company and why should the government get involved? Please comment with your thoughts..
Dubai is one of the seven emirates in United Arab Emirates. It does not have high oil reserves like its neighbours and other emirates, Abu Dhabi being the largest contributors. To offset this lack of 'liquid gold' reserves, the Dubai Sheikh - Mohammed bin Rashid came up with a grand plan, he wanted Dubai to be the next Hong Kong or Singapore and transform it into an open market luring investors from all across the globe. His grand vision included building tallest building in the world to man-made islands off the Persian gulf. It needed a magnanimous effort and investments to make this a reality. Dubai World- a conglomerate of state owned companies was formed which included 'DP World' (which owns 49 ports across the globe), property developers to investment firms. This conglomerate owned several large investments across the globe including the 'City Center' in Las Vegas. It is the largest private investment in a construction project so far. This massive project has casinos, hotels, resorts and theatres built in a 67 acre land on the Las Vegas strip. It has over 6000 rooms and just to keep up with the occupancy rates is itself a humongous task. Vegas is already struggling with falling property values and deepening economic woes, the City Center needs throw away deals to attract guests.
The idea of an open market, lavish constructions and man-made islands was quite unique and never heard off before, but it was unfortunately taken up at the peak of the credit boom. Little did the Sheikh expect that it was the peak and the markets were going to crash right after that. These state-of-the art construction projects have certainly attracted a lot of global investors into the area. Close to $100 billion was pumped into Dubai and more than 30% went into Dubai World for their projects. There was an undisclosed, implicit support from the Sovereign group (the royal family) on this conglomerate that these investments were protected. Lenders didn't cross the blurry line till the first announcement came out a couple of weeks ago. Just the fact that none of the creditors knew the underlying shaky structure till the news came out public, was alarming. Dubai World was in talks with its creditors to restructure a massive $26 billion debt, which the government said it may not back up. As one of the economical analysts put it -"It is too big to fail and too big to gaurantee".
What is even more interesting was to notice its neighbor (Abu Dhabi) who is closely watching the fall out. Being the richest of the Emirates and sitting on a $650 billion Sovereign wealth fund, it is not difficult for Abu Dhabi to quickly bail Dubai out of this situation but it is waiting to see how desperate the situation gets and how much of collateral it can swallow from Dubai in exchange. The first major hurdle was a payment that came up due on Dec 14 for $3.5 billion, it was miraculously pulled off but it will be very interesting to see how Dubai gets out of this situation.
There were some interesting discussions if India should rescue Dubai. Granted there are scores of Indian workers and their families who are directly effected by this turmoil, is it a good idea to get involved when Dubai's neighbors are not extending a hand? India is certainly in a good financial situation with about $285 billion in reserves and is capable of attempting such a rescue but it may not be that great of an idea. Primary reason - Dubai World is still a privately owned company and why should the government get involved? Please comment with your thoughts..
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