Dubai's troubles

Dubai World’s recent announcement that it would be delaying debt payments to a number of institutional investors and banks for at least six months caused considerable volatility in global stock markets on Thursday and Friday. Analysts were quick to interpret the news as a sign that Dubai’s main financial patron, Abu Dhabi, is not ready to enact a wholesale bailout of its neighbor despite the somewhat symbiotic financial relationship between the two emirates. (http://www.nytimes.com/2009/11/26/business/global/26dubai.html?scp=5&sq=dubai&st=nyt) This view seems to be supported by the recent announcement by Abu Dhabi that it would provide aid to Dubai on a “case by case basis.” As Andrew Hammond of Reuters notes in a recent analysis,

“Abu Dhabi has stepped in to help, but avoided a direct bail-out of its neighbor -- but it could be drawn into more direct backing if its own prestige is affected by Dubai's woes.” (http://www.reuters.com/article/ousivMolt/idUSTRE5AP2RZ20091127)

There are a number of competing interpretations about the short and long –term effects of the Dubai announcement on the financial health and future of Dubai. Some analysts think that this event effectively heralds the end of the city’s reign as a regional financial powerhouse since the foreign capital that has funded Dubai’s development will be harder to come by. Others take the view that oil revenues will continue to create opportunities for investment in Dubai, keeping the emirate relevant in the long-term. (http://online.wsj.com/article/SB125917636109164423.html) I tend to agree with the latter view which clashes violently with the prevailing wisdom that Dubai is and was always, a house of cards. One can talk ad nauseam about the sustainability of the Dubai model and the absurdity of attempting to diversify an oil economy by focusing only on tourism and financial services but the position of Dubai in the region as a business center is unlikely to change for a number of reasons. There is no doubt that Dubai will face some competition from other regional cities which aspire to attract foreign investment and position themselves as financial centers, but the inertia, social culture, and infrastructure are all on the side of the city where many multinationals are currently based. There is no other city which has the infrastructure needed to be a regional hub for business activity and a gateway to other emerging markets (mostly in Asia). No other regional city has seemed as willing to house rowdy expats and remove restrictions on alcohol consumption and lifestyle to make the living experience for the professional class more sustainable. The problem with the doom-and-gloom analysis is that it disregards many of the competitive advantages that Dubai maintains relative to its regional competitors as well as the emergence of increasingly interconnected markets in the Gulf. Until other cities such as Doha and Manama are able to build the infrastructure to support large-scale business activity or cities such as Abu Dhabi choose to liberalize their laws, Dubai will continue to serve an important function as a regional financial center and business hub.