Stock markets around the world lurched this week as the full scale of Dubai debt has been revealed. This article will examine the nature of the crisis, the history of Dubai’s wealth and the impact that this has on the global recovery.

State owned Dubai World is seeking to defer payment on some of it’s $60 billion liabilities. At the center of the storm is property subsidiary Nakheel, which has large bond repayments falling due in the near future. Nakheel is thought to have little ability to meet these multi-billion dollar repayments.

Nakheel is responsible for some of the more extravagant building projects that have been undertaken in Dubai in recent years. The Nakheel tower which at 1km tall is the highest building in the world and the Palm Jumeirah which is the world’s largest man-made island are both overly exuberant Nakheel projects.

Very little of Dubai’s wealth was actually built from oil. Neighboring Abu Dhabi has the lion’s share of the Emirate’s oil wealth. Instead, Dubai was built with the careful creation and management of ports, airports, roads and infrastructure; all of which made it an attractive center for regional business.

More recently, Dubai has ventured into luxury real estate projects. Overindulgent hotels, apartments and offices may have appeared attractive in a thriving global economy, but property prices have since tumbled by up to fifty percent in Dubai. Furthermore, these projects were funded with debt and have struggled in the credit crunch environment.

Abu Dhabi has made some inroads into Dubai’s perilous situation, but has stopped short of a full bailout. It has recently bought approximately $15 billion in Dubai government bonds, but appears reluctant to get deeply involved in the Dubai World issue.

This crisis in Dubai does not appear significant enough to completely derail global markets from their slow recovery. It is, however, a sizable shock which has caused an impact in gold, oil and equity prices around the world.

The credit crunch has ushered in a new era of transparency with regard to toxic assets, but this transparency is not found in Dubai. Sovereign debt is usually thought to be secure. If the state will not bail out a state owned company, then where does this leave creditors? How will Dubai World meet its repayments six months from now if Abu Dhabi is not prepared to engage with the situation?

Panicky world markets are expected to recover relatively quickly from this upset but the crisis at Dubai World raises some difficult questions on sovereign debt.

Macroeconomics
dubai, dubai world, sovereign debt