The Economic Crisis in Dubai

Introduction

Dubai has been a country of envy that many others wish to emulate due to its economic success story in the past years. An increasing price of oil, soaring values for real estate, and an increase in commercial tourism have greatly boosted Dubai’s economy in recent years. This success could be witnessed by high skyscrapers, beautiful villas, palaces, and artificial islands among other amazing landscapes. This success has however gone on reverse following failure by the major investing companies. Until recently, Dubai was the most vibrant real estate area in the world (Dubai). However, the inability of Dubai World to handle its financial dent has driven Dubai’s economy in a downhill trend. This has happened at an inappropriate time when many global economies have been facing a crisis. Unexpected results of the Dubai economic crisis have therefore been felt globally. (Whitney)

Statement of the problem

The economic crisis in the United States has overblown Dubai. Like in the U.S, this has mainly been caused by nonstrict conditions by banks when lending low-interest loans. These Loans have been supporting the heavy commercial construction in Dubai. A problem of low demand and unavailability of credit has followed. There is, therefore, no money to spend and at the same time Dubai cannot roll over its debt. (Schrage)

This crisis has its origin in Dubai World. Dubai World is a holding company with several subsidiaries. The Company is partly owned by the government. One Subsidiary of this company operates ports around the world. Another subsidiary is responsible for building real estate in Dubai where the real problem is. The third subsidiary is a sovereign wealth fund. Some subsidiaries of Dubai world took large debts that became difficult to service. (Whitney) The subsidiary of Dubai world involved in real estate took large amounts of credit to expand too fast. They have built luxurious palaces in the desert, commercial buildings, and islands. The debt that they took for this construction was too much that their cash flow system could not handle. (Schrage)

One reason why the Problems at Dubai World have had so many adverse effects in Dubai and other parts of the world is that the problems came as a surprise. They were unexpected. Real estate was seen to be doing very well with a lot of construction going on before this surprise came. Moreover, Dubai world seemed to enjoy the full support of the government which in turn seemed to enjoy the full support of a very wealthy neighbor and fellow emirate-Abu Dhabi. (Khan)

What people think

Most of the creditors lent money to Dubai world on Islamic bonds. Islamic bonds are supported by UK laws and Islamic laws. These bonds attach property like a ship or a building for example. In case the UK gives the creditors a go-ahead to have the properties, which include unfinished villas and hotels, for example, the matter would come before Dubai courts which would then have to determine if the creditors can have these properties. This creates a complex situation that is not very transparent. Dubai is the first place where Islamic bonds have defaulted. It would be very hard for banks to give out credit on Islamic bonds in the future. This could also affect business in these parts. (Khan)

A large portion of the credit that had been lent out to Dubai is from Britain and Asian financial institutions. These are large institutions that support many business operations in the world. It is not clear whether these institutions can restructure to handle this crisis. Financial resources to expand and sustain business activities in the world could be greatly diminished by the Dubai world debt. Moreover, the problem could be compounded further by a situation like that of the AIG where Insurance companies that provide insurance cover for loans to banks collapsed. (Schrage)

Many people had put a lot of trust in Abu Dhabi’s great wealth explaining why banks could lend their money easily to Dubai World in the first place. This rich nation can easily take care of the Dubai problem by bailing it out. This has not happened so far as expected although it recently gave Dubai a bailout of ten billion dollars. (Sorkin)

My opinion

Overly, I think the Middle East economy, in general, is expected to perform well irrespective of the Dubai crisis. This is mainly because the demand for oil is expected to increase especially by increasing demands from China and India. The recent resolutions in Switzerland on pollution will also come as a relief to these countries. These countries could however draw wrong conclusions from the Dubai crisis. For example, foreign investments can be viewed suspiciously although it is generally the way to go for any economy in the world to grow significantly. On the other hand, important lessons like those touching on the need for transparency and openness in investments can be learned from the Dubai financial crisis. (Whitney)

Looking at the situation closely, one does not fail to realize that the failure of Dubai world has affected the local economy negatively. Directly affected are construction workers who have lost their jobs, have not been paid, and may have to receive lower payments for their jobs. Most of the credit that had been lent to Dubai World had been from local banks. This means that the local banks do not have the financial resources needed for business in Dubai. This could lead to foreclosures and bankruptcy for many companies. Reduced business activities mean a sluggish economy. Moreover, stocks prices have also fallen sharply affecting markets. This is something that needs to be addressed with urgency if Dubai is to move forward in development matters. (Sorkin)

I believe that whatever is happening in Dubai is not different from what is happening in the real estate industry in America. Dubai should therefore not be seen to be a country that failed in its policies. Given support, I believe that Dubai’s economy can get back on track and even grow in large digits. The country has a good infrastructure for commercial tourism and its proximity to Europe makes it an easy area to access for European tourists. This however depends much on how the Middle East will come in to handle the crisis. Apart from taking measures like bailing Dubai out of the woods, for example, it would be important for Dubai and her neighbors to develop a financial framework that would encourage investors and restore confidence. More transparency in an investment where investors don’t just trust governments without all the information is necessary. Abu Dhabi should come in more strongly for Dubai since this seems to be the only solution that can help Dubai recover from its financial crisis. (Edwin)

Summary

Dubai’s story proves to us once again that transparency is one important thing that needs to be adopted everywhere for effective investment to occur. Countries like Dubai do not have transparency to a standard that is expected when doing business on global levels. This is especially the case in countries where the government is heavily involved in investments like Dubai. Economic difficulties experienced in Argentina and other countries have shown the world importance of providing adequate information to lending institutions. It will therefore help Dubai and other Middle East countries to come out and show that they are transparent in financial affairs for them to win the confidence of lending institutions in the future. The collapse of a country’s economy not only affects it but the whole world. Other countries should therefore learn from the Dubai crisis and take precautionary measures.

References

Edwin, M.Dubai world Goes to bust. 2009.Web.

Khan, Mohsin.The Cost of Dubai World’s Excesses. 2009.Web.

Schrage, Steven. Dubai’s Financial Trouble: Warning Sign for the Global Economy? 2009.Web.

Sorkin, R. Andrew. Will Dubai be a drag on gulf region-Deal book Blog-NYTimes.com. 2010.

Whitney, Mike. Financial Crisis in Dubai: Towards a Nightmare Scenario? 2009.Web.

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