Rama Krishna Vadlamudi, BOMBAY www.scribd.com/vrk100 Nov. 29
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What triggered the present debt crisis in Dubai?
Why does such a tiny city-state Dubai attract so much attention of the worldmedia last week? This is a baffling question for many investors across the world.Dubai till Thursday was seen as an ‘Oasis of Opportunity’ by many in the world.Dubai encapsulates free-market economy providing excellent living conditions forforeign employees and workers, with seven-star luxury for the rich classes, zerotax rates for businesses, numerous opportunities for the financial markets, offerssuperb port facilities, and a safe haven for criminals and the like. That was tillThursday, when the Dubai World, an investment arm of the Government ofDubai, had announced that it wanted to postpone its debt obligations by sixmonths. This has come as a rude awakening for investors, who were in a state oflull till last week at their own peril.This has unnerved financial markets across the world and had ripple effects onEurope, Asia and the US. The delay in payment obligations is seen as equal todebt default by many in the world. As we know, lenders don’t like such nastysurprises. Till last month, the Dubai Sheikh was assuring that all was well there.State-owned Dubai World is a holding company having investments in a host ofbusinesses. It has a debt of around USD 60 billion (out of the country’s total debtof USD 80 billion) and it invested heavily in property development across Dubaithrough its subsidiary, Nakheel. The latter is building properties, like, The World,Palm Jumeirah, etc, on the sea. Dubai World, till now, was the mainstay ofDubai’s economy. Dubai does not get much revenue from oil. It depends onfinancial dealings, trade, tourism, property development, etc. It has built itsedifice on debt and now with the credit crunch across the world following globalfinancial meltdown, it is reeling under debt. The property bubble burst at last withprices in Dubai crashing by more than 60 per cent putting an end to rampantspeculation. Dubai attracted international attention for its property developmentand luxury tourism, embodied in seven-star hotels, like the Burj al-Arab.Till now, it was assumed by international investors (may be, naively) that AbuDhabi would rescue Dubai with funding. Abu Dhabi is the richest emirate amongthe seven emirates in the loose federation of the UAE. It funded Dubai to anextent of USD 20 billion in February this year. But, this time, Abu Dhabi is silent.There seem to be some differences between the rulers of Dubai and Abu DhabiKingdom.The crash in property prices in the world following the US sub-prime crisis has itssevere impact on Dubai’s property prices. It is reported in the media that Dubaiused to command double the rates of Mumbai till 2008. But now, it seems, Dubaiproperty prices are much lesser than Mumbai property prices – with HiranandaniGroup in Mumbai claiming that Dubai is attractive for property investment now!