A perspective on the Dubai financial 'crisis'

Out-Law Analysis | 03 Dec 2009 | 4:45 pm | 2 min. read

OPINION: Much has been written and said over the last week about the so-called Dubai financial 'crisis'. Journalists have been falling over themselves with talk of an impending collapse that is due to send reverberations throughout the worldwide economy.

Banks and institutions around the world have been assessing their debt exposure to any entity with even remote links to Dubai. Many members of staff working in Pinsent Masons' Dubai office have even had calls from worried relatives at home, asking how they are dealing with the crisis.

The reason for the increased interest in some quarters (panic in others) stems from events last week. On 25th November the Government of Dubai announced that it was asking creditors of Dubai World, a large state-owned conglomerate of companies, for a six month standstill on debt repayments.

Dubai World is one of the three main state-owned enterprises in Dubai, the others being the Investment Corporation of Dubai (owners of Emirates Airlines) and Dubai Holdings (owners of the Jumeirah Hotel Group which includes the seven star Burj Al Arab).

Dubai World includes two of the region's primary construction developers, Nakheel and Limitless, along with a raft of other companies including Dubai Ports and Free Zone World, owners of DP World (the worldwide ports operator), P&O Ferries and the successful Jebel Ali Free Zone industrial park in Dubai.

To those based in and working in Dubai, news of the restructuring of Dubai World has not come as a shock or even much of a surprise. It is common knowledge that the recession has hit Nakheel hard. The company was managing a pipeline of hugely ambitious projects including two new artificial palm projects, the Dubai Waterfront project and a proposal for a new world's tallest tower (bigger even than the Burj Dubai which currently holds the record as the world's tallest building).

The worldwide recession was always going to affect a construction developer so heavily reliant on a continuous cash flow and with such huge aspirations.

Many in the region are bemused by the level of hysteria caused by the Government's announcement. A large proportion of the media reporting has centred on the fact that the Government of Dubai is in trouble. This is an exaggeration. The Government's debt is equal to 40% of GDP which, when compared to the UK's equivalent debt of 400% of GDP, is no cause for alarm. The Government has a projected income of $9.1bn for 2009 which will come from diverse revenue streams including land, tourism, visa fees and customs duties.

Furthermore, Dubai's future does not hinge purely on the success or failure of a state-owned company. The city is filled with a vast array of many of the largest companies in the world. Many of these companies service and trade in not only Dubai, but the whole of the Middle East, Africa, India and even the Asia-Pacific region from their Dubai base. Dubai is unique in this region. It offers a tolerant, peaceful crime-free society with a modern infrastructure and an extremely high quality of life. For the foreseeable future it will remain the hub of choice for companies doing business in this region.

We accept that this is a difficult time for Dubai. It is true that the effects of the global recession will be to scale back some of the most ambitious developments in Dubai and to put an end to the excessive lending that has been prevalent not just in this region but across the world.

However, there were and are already signs of a recovery. As a law firm we are busy. Our clients, including both private and government entities, are busy. Even the traffic on the drive into work is busy once again.

There is a sense of optimism in the city that things are getting better. From the evidence before us we firmly believe that this is the case.

By Brett Sherrard, a solicitor in the Dubai office of Pinsent Masons, the law firm behind OUT-LAW.COM.