BT : Dubai's business hub reputation at stake

Business Times - 02 Dec 2009


Dubai's business hub reputation at stake

THE way that Dubai has handled the issue of the debt incurred by Dubai World - the state-owned investment fund - could have a serious long-term effect on the emirate's credibility as a financial hub.

Last Wednesday, Dubai World announced that it wanted to delay repayment of its US$59 billion debt till end-May next year. The US$59 billion is part of Dubai's US$80 billion debt, accumulated largely from developing lavish real estate projects.

The emirate, one of seven which make up the United Arab Emirates (UAE), has been the business and financial hub of the Gulf region for well over 20 years and has been striving to become a global financial centre as well.

In a region floating on oil, Dubai has very little hydrocarbon resources; petroleum and gas contribute less than 6 per cent of its GDP. But undeterred, the emirate set forth to reinvent itself as a place of big dreams and freewheeling enterprise. With easy finance available from banks awash with money before the global financial crisis, the various companies controlled by Dubai World, such as the property developer Nakheel, embarked on one grandiose project after another.

The city became a magnet for entrepreneurs and the super-rich, not only from the Arabian peninsula but from all over the world.

In fact, Dubai's expatriates far outnumber the locals. The tax-free economy's main revenues come from tourism, real estate and financial services.

As financial crises go, Dubai World's US$59 billion debt is big, but by no means overwhelming. On the face of it, finding cash to repay creditors shouldn't be a problem: Dubai's wealthy neighbour, the emirate of Abu Dhabi, has indicated that it will help 'on a case-by-case basis' and it has enough money to do so.

The UAE central bank has also set up an emergency facility to support bank liquidity. However, the lack of clarity about the terms on which Abu Dhabi's assistance will be forthcoming is worrying Dubai's creditors.

Uncertainties about other liabilities that Dubai-related entities might have incurred add to the problem.

Dubai's credibility as a global financial hub is therefore on the line. It had aimed to develop as a financial hub to rival Singapore and Hong Kong.

But achieving that goal needs much more than capital, connectivity and infrastructure; it also needs clear-cut rules and regulations, a credible supervisory framework, and most of all, trust, which is built up slowly, over several years.

And even then, reputation can evaporate with just one badly handled crisis. Which is why it is so critical that Dubai - working together with Abu Dhabi - handle the debt problems at Dubai World more transparently and equitably. At stake is nothing less than Dubai's reputation as a business hub.