Monday, July 13, 2009

Dubai : A City Built With The Sweat Of Slaves

by The Economist July 9th, 2009

When things go swimmingly, few people seem to mind being run bybenevolent autocrats. When things get sticky, they are less obliging
IT WAS once hailed as a miracle. New cities, even new islands, werespringing out of the desert or the shimmering turquoise sea. Nowadays,ten months after the financial crisis came crashing in on the UnitedArab Emirates (UAE), nearly destroying its shiniest component, Dubai,hundreds of cranes and dredgers have yet to resume work. The QueenElizabeth II, once the world's smartest liner, due to become yetanother posh Dubai hotel, is a sleeping quayside hulk. Nothing ishappening on three of the most recently man-made islands shaped likepalm trees off Dubai's coast that were the latest flashy projects ofNakheel, the emirate's shaky real-estate developer.
These days, despite defiant protestations of resilience, no one seemsto know when the sweet breeze will return. The UAE is still in thedoldrums. For the first time since the seven Gulf statelets joinedtogether as a union in 1971, people are beginning to mutter--ratherquietly, for sure-- whether there may be something amiss with theautocratic, opaque system that hitherto seemed to work so well behindclosed doors. "Nobody really knows what any of the statistics are,"says a Western analyst. "We haven't seen the half of it yet," says aWestern banker, referring to the debt and the possible defaults. It isnotable that almost nobody in business or government is prepared totalk publicly. Cohorts of public-relations people surround the bigwigsand shield them from scrutiny.
In the past few weeks it has become clear, nonetheless, that the bottomhas yet to be reached. Standard & Poor's (S&P), a credit-ratingagency, has issued a string of recent gloomy assessments, downgradingfour Dubai-based banks and noting that "the risk to Dubai's economy hasincreased as the real-estate sector has entered a sharp correctionperiod." Property values are still about half what they were a yearago.
Some foreign building and dredging companies have not been paid formonths, and some Dubai companies are offering to pay them onlypartially. S&P grimly notes the "increased uncertainty regardingthe government's willingness to provide support to Nakheel, a keygovernment-related entity with sizeable repayments coming due at theend of this year." The amount is $3.5 billion. A visiting British trademinister took the rare step, on July 4th, of publicly declaring, whileinsisting that Dubai would bounce back, that British contractors andsuppliers "need to be paid". Earlier this year a leading Dubai figuresaid that the statelet's consolidated debt was around $80 billion, butno one has issued a detailed breakdown of accounts; only a minority ofDubai companies are listed. Others say that the true sum of debt may becloser to $120 billion.
In February Dubai's department of finance issued the first $10 billionchunk of a bond totalling $20 billion to help stave off the creditors,open new lines of credit and reschedule debt. Now, at a time wheninternational banks are still loth to lend, it has been reported thatthe second chunk will be guaranteed by the UAE's government. More maystill be needed.
It is not clear who is in charge--apart from Sheikh Mohammed bin Rashidal-Maktoum, Dubai's ruler (pictured above), whose big interest isracehorses. He appointed a respected local man, Nasser al-Shaikh, totake over the department of finance and sort out the crisis. It wasreckoned that, for a start, he would be empowered to identify the sizeof the debt, both commercial and government (often one and the same)and the extent of Dubai's toxic assets. But in May he was summarily andmysteriously sacked. Some think he was blocked from looking too closelyinto the accounts at Nakheel, among other firms. Otherwise theold-guard management of Dubai--and the UAE--is still pretty intact. Noone has been held responsible.
PUTTING YOUR HANDS OVER YOUR EARSThe two buzz words in Dubai's business and media circles are "denial"and "bail-out". A persistent complaint is that the authorities--inparticular, the ruling family of Dubai and its acolytes, led by SheikhMuhammad--took far too long to recognise the gravity of the crisis whenit broke in September. "They were splashing about in the water whenthey should have been swimming across the channel," says anotherWestern banker. In October Nakheel was still parading grandiosedevelopment schemes. It was not until January that Sheikh Muhammadsummoned Dubai's top businessmen and ministers to take stock and plan arecovery. For months the Maktoums seemed to be in denial.
In the short run, the much richer and more conservative state of AbuDhabi, with 90% of the UAE's oil reserves, will bail out its miscreant,extravagant neighbour, along with the other five, poorer statelets ifthey need help too. "In the long run, Dubai has enough assets to tideit over," says a banker in Abu Dhabi, pointing to Dubai's hugecontainer trans-shipment business, its airline, aluminium smelter,tourism, and role as a regional services hub. Above all, Dubai and AbuDhabi are too enmeshed to allow one part to fail.
Indeed, the Dubai disaster may prompt Dubai's Maktoum family and AbuDhabi's ruling Nahyans to strengthen the federation and work towards asystem of greater accountability and openness. A half-appointed FederalNational Council is toothless, though it can now call ministers beforeit. The legal system, including commercial law, is weak; there is noproper bankruptcy code; there is no real tax base-- nobody pays tax onhis personal income.
Above all, in the words of a longtime adviser to the government, "youhave a confusion between government and commercial operations. There isnobody in Dubai in government who isn't first and foremost abusinessman." There are "massive conflicts of interest" across theboard. "There are no checks and balances...the incentives for sayingnothing are great."
Abu Dhabi is ahead of Dubai in terms of government openness andefficiency. But in both the emirates all the big decisions are stilltaken behind closed doors. In the mild words of a diplomat, "neitherAbu Dhabi nor Dubai are very good at clarity in decision-making." Vitaldecisions are often not put in writing.
The aim of the two ruling families has been to modernise and open upthe economy without modernising or opening up the politics to theextent that the people might one day dispense with their royal rulers.In the short run, there seems little chance of that happening. Theexpatriates who manage much of business have little say in the runningof the place, but are generally content to live well and ask noquestions about delicate matters of state. An English-languagenewspaper, the NATIONAL, backed by the Nahyans, has opened a healthyspace for discussion, though royal scandals or provocative words like"bail-out" or "in denial" are virtually taboo.
The indigenous emiratis, who count for less than a fifth of the 5mpeople living in the UAE, have hitherto been mollycoddled by benevolentrulers. In a couple of years, a recovery may ensue. A resurgence of oilprices is helping. But if the economy gets stuck, the glory days, atleast of the Maktoums, may be numbered.