I followed in horror last week as the international media continuously featured Dubai in their headlines on television and online. It was not good news. Markets from Mexico, Brazil, Germany and the UK as well as Australia have all been affected by the announcement that Nakheel, the property arm of Dubai World, is seeking to defer repayment of a $3.5bn (€2.3bn, £2.1bn) bond due in December. The impact of the financial crisis on Dubai has been felt around the world at the highest levels.
It is already clear that Dubai's future is not what it used to be. But that does not necessarily mean it is facing a bad future. Last Wednesday's convulsion marked a significant milestone in the financial history of the emirate, and a very different Dubai will now take shape.
To overcome the present situation, hard decisions must be made. But the good news is that no other city in the Middle East today even comes close to Dubai in terms of infrastructure and logistics.
Dubai World's request for a debt "standstill" should not be seen as a shock. In fact it is surprising that it took so long for it to happen. The government-owned conglomerate did wonders by expanding its port operations across the globe, eventually turning it into the fourth largest operator in a world where 90 per cent of trade is conducted via cargo shipping. But mistakes were also made.
The expansion into non-core activities was one of the basic factors that led to the company's public embarrassment. Even though it could be argued that Dubai Ports' acquisition of P&O in 2006 was overpriced, it was a strategic asset that consolidated Dubai's position as a trading hub. Not so was the decision to invest $4.6bn in Kirk Kerkorian's MGM Mirage in 2007 to build one of the largest gambling complexes in the world.
The "standstill" request is not the end of the Dubai story. Other countries have gone through the same cycle and emerged in a better condition. In the 1980s, more than 50 countries (about 40 per cent of all nations that owed money to private foreign creditors) failed to pay in full on schedule, according to Michael Tomz of Stanford University and Mark L.J. Wright of the University of California, Los Angeles.
Their research has also found that some countries have suspended payments even when domestic conditions were highly favourable, which may be the case in Dubai today. The emirate has been performing quite well in sectors in which it has traditionally been successful. For example, according to the latest figures, Dubai Airport registered over the past 12 months an 8 per cent and a 17.7 per cent increase in passenger and freight traffic respectively.
The international banks that lent to Dubai, like the emirate itself, may have to swallow a bitter pill and agree to a restructuring in the total debt. Dubai's probable mistake was that it did not do this a year ago when these banks were more receptive to restructuring talks.
Total bank write-downs last year topped $500bn, while Nouriel Roubini, the New York University economist, predicted that losses would reach $2,000bn. Had Dubai Inc. announced that it would not have been able to meet its debt obligations a year ago, it would not have raised so many eyebrows. Much of the world's overreaction to last week's news reflects an unfair "How could you?" sentiment, when things were just getting better.
The truth is, Dubai took advantage of easy credit and poured it into developing the best infrastructure south of the Mediterranean Sea in any emerging economy. Had it not been for the less strategic investments in luxury department stores and other similar assets in the west, then Dubai would have been in a much better shape today.
Dubai has already taken many tough decisions such as launching an anti-corruption crackdown that no other city in the region has dared to. Interestingly, Sheikh Hamdan, Dubai's young Crown Prince, told a World Economic Forum meeting in Dubai last week that he hoped that the positive signs concerning the upcoming environmental summit in Copenhagen would turn into binding agreements. Could this be a sign that Dubai will rein in the environmentally challenging projects it is famous for?
Today, a new Dubai has a chance to emerge: leaner, meaner and better.
This article first appeared in The Financial Times on Tuesday, 1st December 2009