The Dubai Debt Crisis: Undermining Investor Confidence?

As a more upscale version of the American subprime mortgage crisis that started in 2007, will the Dubai debt crisis not only undermine investor confidence but of the ongoing global economic recovery as well?


By: Ringo Bones


To all of us who still care about the overall health of our global economy, the Dubai debt crisis – like the US subprime mortgage crisis before it – unsurprisingly managed to go global by undermining overall investor confidence. Like the subprime mortgage crisis, the Dubai debt crisis can also trace its beginnings in the intervening years. Unfortunately, both had been already proven to readily spread to the world’s shares markets as fear and panic are the primary motivators of market speculators. Dubai’s decision to delay paying debts – i.e. refinancing – for 6 months not only made Moody’s downgrade Dubai’s credit rating but it also started to spook the global shares markets as soon as the press got word of it. Given the supposed financial risk involved, does the Dubai debt crisis create shares markets chaos largely disproportionate to the actual scale of the actual problem involved?

The Dubai debt crisis largely stems – according to financial experts – from its inflated portfolio of luxury properties plagued by cost overruns in their development that resulted in Dubai’s leading property developers to defer their debt obligations for 6 months. Thus making Moody’s – one of the world’s top credit rating agencies – to recently downgrade Dubai’s credit rating.

One of the surest investment options in Dubai is the property developer Nakheel. Famous for making the world’s largest man-made island – the Palm Jumeirah – a reality, Nakheel also boasts as the only property developer with its own in-house environmental assessment team. Nakheel’s apparent fiscal sensibility was shaken to its core after miscalculating the final cost by a significant margin of the development of the Palm Jumeirah island and its scores of 6-Star hotels. Delays in the return of investments / profits due to the still recovering global economy is the main reason why Dubai is currently experiencing their own version of the US subprime mortgage crisis.

Just over a year ago – back in November 20, 2008 – the lavish opening festivities / inauguration of Atlantis Hotel Dubai where the venerable global song and dance sensation Kylie Minogue got top billing would make it seem that Dubai’s current debt crisis seems like a fiscal and economic impossibility. State-owned Dubai World – the firm that made Hotel Atlantis Dubai and the lavish Palm Dubai inauguration party a reality was rumored to have spent 35 billion US dollars to make it possible. Ironically, a year or so later, the property development firm is asking for a government sponsored financial bailout.

The actual development cost oversight that led to the raising of additional capital which Nakheel has never commented publicly is probably one of the reasons why most of Dubai’s top businesses to elect debt payment deferment. Even at the cost of credit rating downgrade. Unfortunately, Dubai’s credit rating downgrade due to its debt obligation problems had resulted in a shares markets slowdown in the US and in Asia. Even Dubai's brother Emirate Abu Dhabi had even offered debt payment assistance to Dubai in order to minimize the chaos to the world’s shares markets Dubai’s debt crisis could create. With total debts at around 60 billion US dollars, Dubai’s current debt crisis is bound to create a significant chaos in the world’s shares markets. Let’s just hope that this is just a minor slump so that the world economy can fully recover soon, hopefully maybe in 2010.