Crisis in the desert

A high-flying ex-ceo sits huddled in a friend’s one-bedroom flat wondering what to do next. Bankers busily scribble off resignation letters after receiving large pay cuts. Expatriates run around in a frenzy winding up their affairs before their visas expire. Labourers from South Asia pack up their meagre belongings and return home. These are the surreal scenes unfurling in Dubai, one of seven citystates in the United Arab Emirates and the once-storied oasis of unbridled, conspicuous consumption.

One of the major reasons for the slump is the implosion of the real estate bubble that spearheaded Dubai’s boom in the past decade.

Most people think that the reason for Dubai’s past success is its oil reserves, but this is a big misconception. Revenues from oil & gas form a tiny 6 per cent of Dubai’s economy. The real drivers behind the rise of Dubai were construction, tourism, banking and shopping—all of which have experienced sharp declines.

For much of the past decade, Dubai indulged in an orgy of construction— fuelled by regional banks—building fantastical projects that were ostentatious in design and price. These included the Palm Jumeirah, an artificial island fanning out into the Arabian Gulf in the shape of a palm frond, consisting of sea-facing, multi-million dollar apartments owned by the likes of David Beckham and Michael Schumacher; the Atlantis, a gaudy $1.5 billion hotel complex that housed a whale shark swimming in a gigantic tank; a massive indoor ski-resort amidst the searing desert heat and Burj Dubai, the tallest building in the world.

Today, the value of Palm Jumeirah’s apartments has fallen by as much as 60 per cent. The Atlantis stands eerily empty and rumours are that work on Burj Dubai has stalled. Investment bank Morgan Stanley revealed that the UAE is delaying or cancelling real estate projects worth $260 billion, the majority of which are in Dubai. Proleads declared that 52.8 per cent of projects are on hold.

Other high-profile projects in trouble include the Meraas Jumeirah Gardens ($98 billion), Nakheel’s Harbour and Tower project ($38 billion), Tatweer’s $3.3 billion 6,500-room Asia-Asia Hotel, Nad El Sheba race course being built by Mayden LLC ($1.3 billion) and the Dubai Exhibition City ($450 million). Dubai’s skyline has become littered with half-finished skyscrapers that give the once-glittering metropolis the aura of a ghost town. 

Dubai's woes Dubai is hardly oil rich.the major components of its economy are construction, tourism and banking The city overdosed on erecting fantastical structures such as an indoor ski resort and the world's tallest building Now, the UAE is delaying or cancelling projects worth $260 billion, the majority of which are in Dubai A wide web of companies sponsored by the city's rulers have racked up some $70 billion in bills Out of work, a large portion of the 1.2 million migrant workers from South Asia are returning home

The carnage in construction and tourism has had drastic consequences for Dubai’s workforce. Once a haven for wealthy sheikhs, speculators, playboys and business executives who enjoyed tax-free salaries and an opportunity to get rich quick, the city is witnessing an exodus of foreigners who made Dubai their home.

Employees in Dubai are now experiencing the brunt of drastic cost-saving decisions. “Canteen facilities have been aborted. Even the free supply of toilet paper may stop,” complains a marketing executive. Banker Shakeel Ahmed reached his office hoping to get a pat on the back for his “good performance”. Instead, he was informed about a pay cut. “Take it or leave it,” said the boss. Ahmed opted for the latter.

Others are acting proactively to save their jobs: “As we are a new company, a group of us voluntarily suggested that our employer cut our salary. It’s a question of survival,” said Aruna Sen, a media professional. Rumours are also spreading that hundreds of families are relocating their children to India after the exams end in March. But major schools denied such claims saying the situation was normal.

The most hapless victims of Dubai’s downward spiral have been the approximately 1.2 million migrant workers from South Asia, who are shipped in to undertake work on construction sites. Housed in squalor in labour camps situated at the fringes of the desert, and paid a relative pittance—around $140 a month—to build these dream buildings, these labourers have seen their jobs evaporate and their visas cancelled. They’ve been left with no option but to return to their hometowns, penniless and laden with the debt that they had undertaken to land these jobs in the first place.

An unanticipated victim of the Dubai meltdown is the city of Dubai itself. Dubai’s rulers are sponsors of a wide web of companies that have racked up some $70 billion in bills, according to reports— almost matching UAE’s collective $82 billion GDP last year. The crisis has become so severe that Dubai recently announced a $20-billion bond scheme and its Central Bank agreed to purchase half of it to keep the city afloat.

The other half of the bond issue was purchased in late February by Dubai’s knight in shining armour, Abu Dhabi, capital of the UAE and the wealthiest Emirate with 95 per cent of the oil reserves in the federation. Abu Dhabi, many say, has grown more cautiously than its neighbour and is bound to supplant Dubai as the financial nerve centre of the region in just a few years. Despite this bleakness, some analysts insist that this is simply a passing phase. “The economy is sliding, but there is no bloodbath.

There is a crisis of market confidence, which is complicated by a lack of transparency and opaque financial declarations by the Dubai Inc. entities,” says Dr Samir Pradhan, Senior Researcher of the Gulf Research Centre. Pradhan says that what is happening to Dubai today is not very dissimilar to what took place in Singapore during the Asian crisis in 1997—and Singapore rebounded successfully in the following years.

Still, Dubai’s recovery is plagued with many more complications than Singapore’s in the late 1990s. In order for it to recover, the city desperately needs to attract institutional funds (a scarcity in this creditstarved global economy), clean up its balance sheet, abandon its gaudy ways and focus on sensible and selfsustaining development. Anything else could bury this once-opulent Mecca of capitalism in the desert for a long time to come.