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Dubai is part of the United Arab Emirates, seven city-states which have separate
ruling families, separate budgets, but security, immigration and foreign policies in
common. Abu Dhabi has nearly all the UAE's oil. To keep up, Dubai from the 1950s
on diversified its economy into ports, trade, services and finance, largely
successfully. But its liquidity-fuelled real estate and tourism binge in the last decade
may have been one step too far.

Dubai announced that it would ask creditors of Dubai World, the conglomerate
behind its rapid expansion (it built the worlds tallest building), and Nakheel, the
builder of its palm-shaped islands, to agree to freeze debt repayments for six
months. Some commentators are of the view that banks that have lent money to
Dubai World could suffer significant losses if the company were to default on all or
part of its $59 billion debt. Dubais total debt stands at $80 billion. If creditors were to
reject proposals to postpone debt repayments for six months, the Dubai government
could be forced to hold a fire sale of its international real estate assets.

Analysts however are of the view that other emirates of the UAE United Arab
Emirates -such as Abu Dhabi are unlikely to be affected by Dubais crisis significantly
since their funding is derived from exporting oil and gas.

The key factor behind the crisis is the boom-bust policy of the UAE central bank.
After closing at 4% in October 2006 the yearly rate of growth of the central banks
balance sheet (the pace of monetary pumping) climbed to 177% by December 2007.
In response to this pumping the yearly rate of growth of UAEs monetary measure
AMS jumped from 6% in October 2006 to 62% by April 2008. This massive pumping
has given support to various activities that without the money pumping wouldnt have

emerged. In short these activities cannot stand on their own feet without support
from monetary pumping.

Since January 2008 the pace of pumping by the central bank has been trending
down. In January this year the yearly rate of growth of the central banks balance
sheet plunged to minus 36.5%. As a result the yearly rate of growth of money supply
fell to minus 12.5% by July this year. It is the fall in monetary pumping that is
currently putting pressure on various activities that sprang up on the back of previous
massive monetary pumping.

We suggest that other emirates are unlikely to escape the effects of the boom-bust
policies of the central bank. Also, in other emirates loose monetary policy set the
platform for new activities and the expansion of existing activities. As a result of a
decline in monetary pumping by the central bank these activities are currently also
under pressure.

The emirate has said it has $80bn of debts, though some analysts say the true figure
could be double that. Dubai World, the state-owned holding company whose bail-out
plans triggered the current crisis, has liabilities of about $60bn, though only part of
that is debt. The main problem is its real estate subsidiary Nakheel, which has huge
bonds coming due, including an Islamic bond for $3.5bn in December. It appears to
have little cash flow to meet payments - as well as relying on debt, it also sold most
developments off-plan, with new developments now on hold.
The property crash hit Dubai at the time - house prices fell 50% in six months.
Nakheel was known to be in trouble. But investors assumed that as a state-owned
company it would not default on its debt. The government refused to issue detailed
statements of how it was to handle Dubai World's debt problems, and rounded on
those who said that the crash had undermined Dubai's development model.

This encouraged a belief that a rescue package was already in place, probably
funded by Abu Dhabi. The statement on Wednesday that the government was asking
for a six-month standstill on repayments implied the rescue was in doubt.
Abu Dhabi has, via the federal central bank, bought one $10bn bond issued by the
Dubai government earlier this year, and, via its own banks, bought another $5bn
bond this week. But the latter came with a rider that it was not to be used for the
Dubai World bail-out. This raises two questions: what are the other debts for which it
is to be used? And how is the Dubai World debt to be met, even after the six-month
delay, if Abu Dhabi will not fund the rescue package?
Dubai World owns DP World, the successful ports operator which bought P&O.
Other arms of the Dubai government, and the ruling family's directly owned holding
companies, also own successful companies such as Emirates Airlines and Jumeirah
Hotels, as well as stakes in buildings and businesses around the world, including the
London Stock Exchange. But the emirate's lack of transparency and relatively
untested financial legal system means that no-one knows if these can be demanded
as collateral against Dubai World and other government debts.
At the most basic level, fears that exposed banks will have to write down losses, and
that both Dubai and Abu Dhabi may have to sell worldwide assets, has hit prices
everywhere. At an "animal spirits" level, the disclosure of significant unforeseen
problems in Dubai has refocused attention on where else might have hidden "black
holes". The health of sovereign debt worldwide, already seen as the major financial
issue for the next decade, is also being re-examined.
Dubai is still seen as the premier place to do business in the Middle East and
beyond. It is a preferred base for not just Arab but Pakistani, Iranian and even Indian
businesses, due to the wider region's political uncertainty. Its reputation for liberal
attitudes helps. But events this week have damaged its reputation for economic
competence, which the emirate's rulers will now have to work hard to restore.

A possible debt default by Dubais two large government sponsored conglomerates

sparked worries in financial markets of another round of global economic turmoil.
Dubai has requested a freeze on payments of some of its $80 billion debt for six
months. We suggest that the key factor behind the crisis in Dubai is the classical
boom-bust policies of the UAE central bank. The phenomenal expansion in various
structures in Dubai was mostly on account of massive monetary pumping. Thus in
December 2007 the yearly rate of growth of the central banks balance sheet stood
at 177%. The bursting of the bubble came on account of the strong fall in money
pumping. Since January 2008 the pace of pumping by the central bank has been
trending down. In January this year the yearly rate of growth of the central bank
balance sheet had plunged to minus 36.5%.

The Government of Dubais Department of Finance (DoF) released a report which

highlighted how it overcame the 2009 global financial crisis by taking a number of
measures, saying that the Government of Dubai was not adversely affected by the
credit crunch which had spread across the globe.
The Government of Dubai was not drastically affected by the economic crisis unlike
many other countries who engaged in budget reduction that contributed to
deepening the recession and lengthened their recovery period, DOF said in its
report titled The Global Financial Crisis Lessons Learned.

Under the sub-headline How Dubai overcame crisis, it stated that apart from a
range of measures the government took, it says fees were not increased but rather
some were decreased and also it allowed the private sector and individuals to pay
government fees in instalments. All these measures helped the government
overcome the crisis and improve the financial situation.
The Department of Finance said Dubai took following steps to overcome the
- Approved the largest budget in the history of Dubai, amounting to Dh41.36 billion in
the fiscal year 2009.
- Completed all ongoing projects, the most important being the Dubai Metro which
was inaugurated on 9/9/2009 without any delay.
- Activated the policy of public spending efficiency in operating expenses and
increased capital expenditures to maintain the quality of government services.
- Complied with public financial policies.
- Fees were not increased but rather some were decreased.
- Put in place a policy whereby government fees are paid by installments for the
private sector and individuals.
- Restructured financial and banking institutions and increased the governments
involvement, thus improving their financial situations to overcome the crisis, and
merged some of the local banks to build strong entities able to face crises.
- Established a supreme fiscal committee
- Established executive financial team for Dubai Government
- Established Dubai Financial Support Fund.

- Supported and restructured struggling companies to operate again, mainly Nakheel

and Dubai Holding.
- Established debt management.
- Established The Real Estate Regulatory Agency (Rera).