Quantifying Dubai's woes

The problem for some offshore European banks is serious but we think manageable

Peter Esho 01.12.2009
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The current situation
Dubai's surprise request to defer payment until May on a maturing $3.5 billion Islamic bond caught many by surprise. The emirate successfully raised $5 billion from bonds just hours before the request to postpone payments was made. Dubai's ability to successfully raise money over the past few months restored credibility and confidence with investors. The situation is complex and not as straightforward as markets indicated over the past few days. There doesn't seem to be any large-scale contagion across the Gulf region at this stage. Instead, we think Dubai's situation is a financial problem with social and political ramifications.

Dubai is one of seven emirates federated under the United Arab Emirates (UAE) and over the past decade has established itself as a significant regional player. Dubai's growth was driven by its ability to binge on cheap debt and attract foreign investment. It accumulated known debt of around $80 billion, which is close to 100% of GDP. The rising oil price through 2008 saw petrodollars recycled in regional projects, with some of it making its way to Dubai's booming construction industry.

Perhaps the most important factor in Dubai's recent growth was the decision to allow foreign investment in its real estate sector, setting the stage for arguably one of the largest post-war property bubbles. At one stage Dubai had around 25% of the world's cranes working on its vast construction projects.

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Peter Esho  

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