Earier this month I posted a blog titled Is the bubble set to burst again in 2010? Today in The Times is reporting that the second wave may be hitting earlier than expected. The front cover article titled Dubai in deep water as ripples from debt crisis spread informs of the £14b in value lost by UK banks yesterday as fears spread of a dangerous new phase in the economic crisis that swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill. The latest reports are that the market has recovered some ground but fears still remain on who is exposed the most to this new crisis. Is this the AfterShock from the tsunami that hit the world financial market just over a year ago and will our markets be able to withstand the next wave? Only time will tell but one thing that this new event does reinforce is our view at TomorrowToday that even as we emerge from the longest recession in UK records, there is now a new normal and the world has changed. Only the boldest and bravest companies will survive this Brave New World. Contact us to learn more about the trends we have identified in the New World of Work.
You can read the article in The Times or read on below
From The Times
November 27, 2009
Dubai in deep water as ripples from debt crisis spread
Patrick Hosking and David Robertson
Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.
Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.
Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.
Although the scale of Dubai’s debts is comparatively modest at $80 billion (£48 billion), the uncertainty spooked the markets, with no one sure who its creditors are. Several banks rushed out statements to reassure investors that their exposure was small.
The FTSE 100 plunged by 171 points to 5,194 — its biggest one-day fall in eight months in one of the most jittery days in the financial markets since the depths of the banking crisis.
The Treasury, the Bank of England and the Financial Services Authority were monitoring events closely and are demanding figures from UK banks on their loan exposures to Dubai.
According to a senior government official, Dubai’s crisis is regarded as modest and manageable for Britain, but there were growing fears that Abu Dhabi, the oil-rich neighbouring emirate that has in the past given rescue loans, would leave Dubai to its fate.
Dubai World, the state-owned corporation that began the panic on Wednesday by demanding a standstill on its interest payments, worsened the mood when it postponed a teleconference for its bond holders, saying the phone lines were overwhelmed.
Gerard Lyons, chief economist with Standard Chartered, said: “The market reaction shows how vulnerable some economies are to the aftermath of the debt binge. This highlights how fragile confidence is.”
The Eid al-Adha religious holiday in the Middle East, and the closure of financial markets in the United States for Thanksgiving, exacerbated the sense of uncertainty in markets that were open for business.
A computer crash at the London Stock Exchange, which by coincidence is 21 per cent owned by the Dubai Government, left dealers unable to trade for three and a half hours.
Shares in HSBC slumped by 5 per cent, wiping £6.2 billion from its value. According to the United Arab Emirates Banks Association, HSBC has £11 billion of loans outstanding to the UAE, of which Dubai is one of seven emirates. HSBC declined to comment.
More than £2.6 billion was slashed from the value of Barclays, while Lloyds and Royal Bank of Scotland, both partly owned by the taxpayer, saw their values fall by £1.7 billion and £1.5 billion respectively.
One analyst said that the fears were overdone because Abu Dhabi would eventually come to the rescue to save the UAE from embarrassment. Dubai World has liabilities of £36 billion, about three quarters of Dubai’s total state debt. Its subsidiary Nakheel built The Palm Islands development, but the property bubble in the emirate burst a year ago, leaving buildings unfinished, debts unpaid and paper fortunes erased.
It certainly is scary to see this Dubai crisis, since Middle East oil money has been seen as a calm and steady “pot of gold” to help everyone else out. However, Dubai has been in crisis for some time, and this mini-crisis moment should really not be a surprise to anyone with an eye on that region. My predictions are as follows:
1. This will not turn out to be a huge crisis. All the banks that have exposure in the region should have known the risk, and have probably got some contingency in place. So, after a few days (or weeks at the most) of “panic” (as the media might label it), calm will return. Of course, there will be some casualties in Dubai itself. But that should be no surprise to anyone who has been to the place. Growth there has been too fast for too long, and was clearly unsustainable (even before the global financial crisis). But, even more importantly, the culture of Dubai has been diluted and strained for too long. See a previous post at this website (see especially the comment made by my colleague, Barrie Bramley): http://www.connectioneconomy.com/2006/07/07/dubai-in-the-connection-economy/
Which leads me to my second point…
2. Dubai has done what it has done because it is nearly out of oil. But it’s next door neighbours have no such (immediate) concerns. Abu Dhabi has been giving money to Dubai for at least a year now. And there are strings attached. I have heard from many reliable sources that the Abu Dhabi money is being given on the basis that Dubai roll back some of its more liberal stance on culture. So, for example, all children are being taught Arabic and the Koran at school. My children are taught English and Christianity at their school in London, so that seems only fair – but I believe that many foreigners are up in arms about this. Some of the mosques have stopped using the standardised call to prayer. I doubt they’ll change the weekend back to Thursday and Friday like in most Arab nations, but I wouldn’t be surprised if they did.
My second prediction then is that Abu Dhabi and Saudi Arabia will help bail out Dubai. But they’ll do so on the condition that they get to control the culture and religion of Dubai, and revert to a more Arab/Islamic approach.
I also predict, paradoxically, that this could be a good thing. Good for Dubai, which needs to reclaim its culture and find a style of its own. Good for Islam (I say this from a Western, Christian viewpoint) in that it will force further work on integrating Islam into a modern, globalised, connected world environment. And it will be good for the world economy, as the Middle East won’t melt down.
I suppose we’ll know in a few months time whether I am right or not…
Graeme, great comments. I think you are spot on, at least from a rational point of view. Dubai has been a strange model and on my visits to Dubai I did get a sense that it was floating on a bubble that was either going to explode or float on the further heights.
The problem at the moment though is that the world is not responding in a rational manner and the chain events we have seen over the past year or so have been unprecedented. Who would’ve thought, at the time of the nationalisation of Northern Rock, that this was the start of events that would rock the financial sector to it’s core? It is predicted by leading figures in economic circles that the world economy is too fragile and a “W” rather than a “U or a V” recovery is expected. Much of what you point out would’ve been known by the markets and yet the response was very panicky. Like you I don’t think Dubai will represent the next wave, but like Northern Rock it may be a ripple that sets off the next wave.
Personally I hope this ripple washes ashore and remains just that, a ripple. But in these unsure and unprecedented times no one can be sure and I think that is why the markets responded the way they did at the news from Dubai.
Thanks for you comment, I hope you are right, I think you are but we are living in unpredictable times.
great post as usual .. thanks .. you just gave me a few more ideas to play with
Good points. What it definitely does show is that the bankers still have not learnt their lessons fully. And it shows that they are still living in the delusion that everything will soon go “back to normal”. The institution of banking has been profoundly shaken by this recession – and it seems that more shaking must happen before rebuilding can begin.
And that analogy is about as perfect as it gets for Dubai itself…
I am always caught between two things when I get a prediction right. Do I crow and say, “I told you so” and point out how precient I was. Or do I remain more humble and keep a deep sense of satisfaction internalised? Mostly, as an introvert, I stick to the latter. But, everynow and again I can’t help myself. Today, I feel very clever, having predicted precisely how Abu Dhabi would come to Dubai’s rescue. Of course, we don’t know the backstory that I suggested – but time will tell us whether there were cultural and religious strings attached to the loan.
Check out the story at http://news.bbc.co.uk/1/hi/business/8418013.stm
In the year end Spectator special edition, the following little side piece appeared – it is an interesting take on the desert kingdom. It rings true with what I saw when I was there.
A ‘new paradigm’ built on Sand
by Eric Ellis
At Dubai’s soaring, spurious peak, one factoid the emirate’s bling-burdened battalion of ‘corporate communications consultants’ liked to slip to junketing media was that Dubai had the world’s densest concentration of cranes. Impossible to verify but too good to ignore, the glib observation almost always made it into media reports. It compelled people to want to go where the action was: subliminally, it suggested an economy where the fast buck came easy.
And it certainly seemed true from the spas of Dubai’s ‘seven-star’ hotels, rising over a city-state-as-building-site which was also constructing that contrived archipelago for Premier League millionaires and their ilk. One towering temple to the Al-Maktoum clan’s ‘vision’ was so tall — or so it was often said, over flutes of Cristal at the China Moon champagne bar — that its Pakistani crane operator slept in the cabin nearly a kilometre up because to descend to ground level took so long and ate into his overtime earnings. Cosmopolitan Dubai was a ‘world city’, a ‘free zone’ where anyone of any creed from anywhere could get rich quick. And that yarn was devoured by chavvy main-chancers wanting to remake themselves some place where no one much knew or cared who they were.
But a more apposite factoid was the one that said Dubai had the world’s densest concentration of those overtanned, overpaid ‘corporate communications consultants’ — all selling a ‘new paradigm’: these sultans of sophistry conjured images of wise men in dishdashas having somehow conceived a uniquely Dubaian, highly developed reinvention of capitalism and commerce.
It was the sort of bogus twaddle I imagine Bernie Madoff spouted to eager ears in Floridian country clubs, Icelandic bankers to Middle England’s local authority treasurers, and Enron to everyone. I used to hear it in late-1990s Silicon Valley and most anywhere in Asia circa 1996, just as I suppose 17th-century Dutch tulip vendors employed boosters to say they were the smartest guys in the hothouse too. People want it to be true, and in Dubai it was especially easy to believe your own twaddle because there were so few checks on it.
Conflicts? A foreign banker I know didn’t care that the same bureaucrats who regulated him were also connected to competing banks. Dubai’s new paradigm meant ‘everyone is on the same page, that’s the beauty of this place’. It didn’t fuss him that dozens of foreign businessmen have been locked up without trial and refused exit visas after falling foul of a grumpy sheikh. Due process wasn’t an issue because ‘they must have done something wrong’.
In truth, Dubai’s ‘new paradigm’ was one of the world’s oldest — slave labour. It was as if Dubai’s planners had scanned IMF surveys and dispatched recruiters to the world’s poorest 20 nations. Droves of hopeful Sri Lankans, Indians, Pakistanis, Nepalis, Filipinos and Africans arrived to work 18 hours a day in jobs that paid nowhere near the promises made by the sleazy employment agencies that sent them. The workers’ passports were seized — and sometimes their first year’s wages too, to pay their agents’ expenses.
They often lived at Sonapur, a squalid ghetto between Dubai and Sharjah where as many as 300,000 ‘guest workers’ were billeted in a wretched sprawl of utilitarian dormitories, gravel roads and open sewers, hidden in the dunes. It’s one of the Gulf’s biggest communities but it’s not on any hotel map or road sign. Un-airconditioned bunkrooms for four slept 12 men in three shifts. There was no privacy, no quiet and little dignity.
But to mention Sonapur among Dubai’s plutocrats was like farting in a lift. Lips curled at this inconvenient truth. When asked about labour conditions, flaks would scramble to say things like ‘our HR policies are heavily guided on international best practice and we undertake considerable international benchmarking’. That’s from Emirates Airlines, which claims to be one of Dubai’s more enlightened employers and told me in high dudgeon last year that they paid their baggage handlers 2,000 dirhams a month, ‘comparable to other international carriers’. That’s about £3,900 a year, the cost of a first-class London-Dubai return.
But of course, Dubai adhered to best practice in corporate governance and transparency, and we know that because the PR men said so. By overwhelming us with hype they did their damnedest to shield the property developer Nakheel (‘where vision meets humanity’), its state-owned parent company Dubai World and the conflicted regulators overseeing this unchecked free-for-all. When the former Lloyd’s of London rescuer Ian Hay Davison actually tried to do his job as chairman of the Dubai Financial Services Authority in 2004, hidden hands pushed him out.
The corporate undertakers now picking over the emirate’s commercial carcass might discover that even in distress, little has changed. The Al-Maktoum clan don’t make mistakes and they pay people a lot to say so. The last thing they’ll admit is that Dubai was built on sand.