Advertisement

Dubai: From riches to rags

One could never imagine that Dubai, known for its glitz, glamour and opulence could ever suffer such a fate.

Smita Mishra
The crisis that struck Dubai last week was almost like a bolt from the blue. One could never imagine that the emirates, known for its glitz, glamour and opulence could ever suffer such a fate.Dubai was not just the place where the rich went to shop and enjoy. But it was also the world of poor man’s dreams and we Indians thought of it as a land with a Midas touch. Dubai was our gateway to prosperity. When the world was suffering under the impact of the economic crisis, Dubai was inaugurating Atlantis! Rising from the warm waters of the Arabian Gulf, this exotic resort, an architectural wonder which offered unimaginable luxuries at staggering prices had left us all gaping. And then two months later, when the global economy finally began to pick up momentum, Dubai was hit terribly by an economic crisis! Was it ominous? Are we not acutely reminded of Plato’s lost city of Atlantis, a marvel of architecture and engineering, an emblem of wealth and perfection, an epitome of happiness and fulfillment that was all of a sudden hit by a devastating earthquake and was forever submerged under the mighty ocean, never to surface again… Gods punished Atlantis after the people there became corrupt and greedy, or may be Plato was trying to make a point, but what went wrong with Dubai? Why Dubai suffered? On November 25, the Dubai government announced the restructuring of Dubai World, the Emirate’s investment arm asking all financial providers of the company to "stand still" and extend maturities for at least six more months. Dubai World raked up to $59 billion debt that it could not pay back, triggering panic buttons all over. It revived fears of sub prime crisis which had forced many developed economies into recession 13 months back. The ripples of anxiety shook Wall Street, Dow Jones, Asian markets and several other nations and institutions that had any possible monetary transaction with Dubai. Dubai which invested heavily in lavish developmental projects like the giant Palm Tree Island, Burj Dubai, Etisalat towers etc. got struck with a glut of real estate with no takers. Dubai’s growth began with the discovery of oil in the Emirate in 1966. In 1968, it was almost a desert with a population of just 58,000. This swelled to 1.2 million in 2006. Of this, 80% were expatriates. With the rise of population the property market also expanded. Dubai’s economy that was originally built on oil industry saw a major shift in 1999 when the property market was opened to investors from outside the Gulf Cooperation Council Countries. Oil’s contribution in the economy shrunk to a mere 6% and real estate which earlier contributed nearly 22%, began to expand gigantically. As per Morgan Stanley statistics, property prices in Dubai rose 25% in the first half of 2008 after having risen 79% in 2007. Then began the economic crisis, when speculators began selling out, and real estate prices crashed by a whopping 41% in first quarter of 2009. They have continued to fall since then, forcing an exodus of expatriates in large numbers each day. The real estate bubble had propelled Dubai’s expansion on the basis of borrowed cash and speculative investment. But the moment it burst, it exposed the scrape beneath the glamorous fashion shows, extravagant VIP parties and mindless spending on luxury cars and profligate lifestyle. Impact on India Among the most shocked by the news was India. It is difficult to be assured by the Finance Minister that the turbulence in Dubai is not going to reverberate through our land. He is right when he says that the amount involved is small and the exposure of our banking system is limited in Dubai. But what about the money remitted every year by one million resident Indians there? This money amounted to Rs 9,300 crores in 2008 alone! The Gulf accounts for nearly one fourth of total remittances into our country and 40 per cent of the population in the region consists of Indians. States like Kerala from where a major chunk of population goes to the Gulf in search of jobs is already witnessing return of hoards of people from Dubai after getting pink slips. Migrant workers who often sold their lands to pay for their passage to Dubai are returning home jobless and distraught. The saving grace for India however is that although many Indian companies are involved in infrastructure development and real estate projects in Dubai, most of them are not big enough to create a major crisis here. If reports are to be believed as a long term fallout of the Dubai crisis, our exports are going to be the most affected as the UAE region is now India`s largest export destination toppling the United States. Besides, bullion trading in Dubai is likely to be impacted, which may have a ripple effect for India as around $29 billion of gold from India is being traded there. This may likely mean a further rise in gold prices. However, the silver line lies in the fact that the ongoing crisis would only impact Dubai`s economy, and emirates like Abu Dhabi are likely to remain stable and untouched which will help mitigate the damage to India`s exports to the UAE. Our container traffic and ports are also likely to feel the impact as DP World- a subsidiary of Dubai World - operates five container terminals in India which account for nearly 40% of our country’s total traffic. Apart from Bank of Baroda which has Rs 4000 crore direct exposures in Dubai, others that have significant presence in UAE and are likely to experience ripple effect are State Bank of India, ICICI, Union and Axis Banks. The Solution It is no secret that all eyes today are resting on Dubai’s wealthy neighbour Abu Dhabi. It is being surmised that Abu Dhabi with its riches amassed from oil sales will rescue Dubai from its predicament. While Abu Dhabi’s wealth fund that was once worth $1 trillion has also been badly hit by recession as well as the tumbling oil prices that have fallen by nearly 60% in the past few months, yet meetings between the two neighbors are taking place. While Dubai was hoping for a complete bailout, Abu Dhabi has agreed to rescuing Dubai on a case by case basis. How big or public this help would be, we do not know as Dubai has always been very secretive about its economy, but all that we hope now is that the splendid and resplendent Dubai does not fade into oblivion like the lost city of Atlantis.