Dubai’s 2009 Financial Debt Crisis
In 2007 a global financial crisis emerged around the world and was known as the worst financial crisis since the great depression in the 1930s. The crisis affected many economies around the world and Dubai was no exception to those negative effects, in fact in 2009 Dubai’s 6-year boom bubble completely burst which resulted in them going into debt for billions of dollars. The government and the ruling family wanted Dubai to be the biggest and the best at the time, which lead to many reckless investments and borrowings of billions of dollars resulting to the debt crisis that almost ended Dubai. This essay will discuss the factors that lead Dubai into the debt crisis in 2009 and the consequences that can still be seen to this very day; How they were able to recover from the crisis; and last but not least how the break-down of market discipline may have played a role in the financial crisis.
Dubai’s 2009 Financial debt crisis
From skyscrapers to 7-star hotels, Dubai is known as one of the most extravagant and luxurious cities in the world, but the ambitious strategy of economic growth had its consequences. On the contrary of general beliefs, Dubai’s revenue does not solely rely on oil. In fact, in 2007, oil was only 6% of its revenues while tourism and their investments in the real-estate market made up 22.6% of their economy (GKToday, 2009)1. In 2003 Dubai’s economy was growing exponentially which led to a real estate boom for many years. Dubai had a bright future and everyone wanted to be a part of it, therefore it became the center of countless of projects and constructions of the world’s “biggest” and “Tallest” properties like The Burj Dubai and the palm islands etc. However, what wasn’t acknowledged was all the growth was based on the government borrowing billions of dollars and going into debt. The debt crisis of 2009 was mostly triggered by one state-owned investment company’s actions; Dubai world, that manages large known companies like Nakheel (that built the Palm Jumeirah and Burj Al Arab) and Istithmar. In 2007 due to the global financial crisis, property prices started falling, and by 2008 the prices of real estate in Dubai has fallen by 50%. By then Dubai World was in debt for about $60Billion dollars and just Nakheel had many bonds including an Islamic bond worth $3.5billion that was due at the end of 2009. (Spenser, 2009)2
Due to the crisis, most people withdrew all their investments and Dubai world did not have sufficient cash flow for repayment of their debts. No one wanted to buy or lend money to the real estate economy anymore, Dubai’s stocks fell down by 6% and just Dubai’s world’s stocks fell down by 15% or more. (Wearden, 2009)3 This resulted in Dubai World and Nakheel asking for a repayment standstill for 6 months which triggered the debt crises.
As seen in figure 2, due to the economic recession of 2008-2009, The UAE’s GDP took a downfall to -5.2 which is the lowest it has ever been. But as seen after a couple of years the UAE did continue to grow again with a GDP peek in 2012.
The government’s actions
Dubai World is a government-owned property, and additionally, the ruling family has many investments and shares in the company; but It is still seen as an established independent company. (Wearden, 2009) So while Dubai World grew benefiting from government guarantees when they were raising high revenues and fulfilling the aspirations of the ruling family for an economy driven by real-estate; when the crisis hit in 2009, the company was completely cut adrift and left to its own consequences. The government believed that it has no obligations to help government-related entities and that they should be responsible for taking those risks. (Wearden, 2009)4 Personally speaking, I believe the government should have helped with some of the repayments of debt because it could have helped decrease the negative effects of the crises triggered by these actions. Maybe this wouldn’t have happened in the first place if the government didn’t have such high ambitions for Dubai with borrowed money and reckless investments. Even Abu Dhabi; Dubai’s neighbor state, sees Dubai as reckless. With that said Abu Dhabi came to Dubai’s rescue eventually with $10 billion for Nakheel to be able to repay its bonds. (Watson, 2010)5 Eventually, the company was able to make a deal with all the creditors for a late repayment till it gets back on its feet. Eventually they started paying back their debts and Dubai started rising again in the next two years.
Consequences and effects on the economy
The financial crises of 2009 had many negative consequences in Dubai and it was very evident in every corner. Half of the construction projects were canceled and left un-built; from towers and skyscrapers to hundreds of houses totaling almost $600bn dollars or more. (Lewis, 2009)6 Tourism saw a downfall when luxury hotels that used to be jam-packed where completely empty and businesses who just opened their shops had to close down due to the drop in sales. The crises in the real estate market affected almost all businesses in Dubai and created real chaos, thousands of people lost their jobs and businesses. Just Dubai world alone laid off about 10,500 employees. (Rodrigo, 2015)7 The ones who suffered the most were the numerous construction workers from India working on all the projects. It was reported by the Indian embassy that a month into the financial crises in 2009, about 20,000 workers booked a flight back home to India due to losing their jobs. (Lewis, 2009) Speaking from personal experience my father owned an architecture firm in Dubai and between 2009-2010 he had to lay off more than half of his employees due to insufficient cash flow at the time. Even though Dubai has recovered from the crises by now and is growing faster than ever, many people believe that history may repeat itself and due to the countless of projects that Dubai is taking to be the best, they might be heading the same direction again.