Will Dubai “Sheikh” the World?

  • SumoMe

Dubai, one of the seven states that make the United Arab Emirates has finally succeeded in grabbing worldwide attention albeit, for wrong reasons. A real estate bubble propelled a frenetic expansion of Dubai’s economy for six years in continuum. Foreign investments took an unprecedented surge in that period. Palm Jumeirah, a large-scale construction project in an island extending into the Gulf Sea is worth a mention as it was all over the print media due to participation from celebrities around the world including David Beckham, Michael Schumacher, Hamid Karzai and a score of prominent others. All of a sudden, the real estate bubble that kept growing in size owing to rapid expansion and bulk investments, has suddenly burst and has landed Dubai in the spotlight.

Now, the factors that led to the sudden burst are simple and conspicuous. Dubai World, the investment company that manages and supervises a number of portfolios and projects for the Dubai Government has a central role in Dubai’s economy. The effect of the global recession on Dubai’s real estate market gradually built up to a predicament wherein Dubai World was forced to ask its financiers to extend their maturities until May 2010 or in other words delay for six months payment on their debts. Such a development after an 18-month-long worldwide downturn nevertheless created ruckus and confusion in the financial arena. Stock markets were hit hard for a day and trading was suspended in many Stock exchanges. Dubai’s failure has re-awakened a number of dormant fears in investors. Many worry about banks that had lent heavily to the region. There are concerns over a fallout from Dubai’s debt problems to have hit investor sentiments. Asian stocks plunged on November 27th, a day after the formal announcement of the debt woes came from the Dubai Government. The impact, however was short-lived. Asian and European markets bounced back promptly and confidence was restored after it was estimated that the debt wasn’t big enough to trigger a systemic failure. The Dubai economy nexus is essentially less complicated and its possible global impact is not to be weighed against the American economy’s sphere of influence. Hence, a serial global downturn was immediately ruled out by economists worldwide.

The $80 million debts that shook the world for a short time is undoubtedly a cause for concern. But since the property markets in budding economies like India are robust and propelled mostly by internal demand, its impact in these countries are prone to be minimal. But what will happen to the celebrity investors who have parked heavy funds in the Palm Island? The unfinished constructions and the standstill in the property market surely look to haunt the Beckhams and the Schumachers.

A majority of real estate developers in India, China and a host of the EU nations have conveyed that they are insulated from the Dubai Financial crisis. The very fact that Stock markets bounced back immediately is a vindication of the same. But the crisis is nevertheless a reason to worry about for the United Arab Emirates and other middle east countries. The number of recent job losses in the region is an indicator of the impact on the gulf economies. The real estate markets in that region have come to a standstill and expatriate job losses are increasing rapidly. The situation has been worsened by the hands off approach taken by the governments in Dubai and Abu Dhabi.

Will the Sheikhs shake the world then? By and large, opinions seem to categorically dismiss any global impact.But many investors in Abu Dhabi who bought into the Dubai boom will lose money if the bust turns into a protracted slump. In short, Dubai is not yet a gateway to the financial world. But it can cause serious trouble to its neighborhood if the situation worsens.

Pradeep Sekhar

[Image courtesy: http://3.bp.blogspot.com/_rJ7v1vK2LC8/SPUFFgPp12I/AAAAAAAAA0U/HN8v7zBTcXM/s400/dubai+financial+market.jpg]

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