Dubai: Leaving Reality Behind and Announcing More Fun Projects

Dubai has always fascinated me because of its unique combination of limited revenues, no natural resources, and extravagant spending. In the days of free flowing capital, the emirates’ lavish spending did not cause much concern but this changed when the funding tap got turned off following the 2008-2009 global economic crash. Consequently, Dubai’s economy contracted 2.4 percent and it literally ran out of money, forcing Sheik Mohammad bin Rashid Al Maktoum to ask Abu Dhabi for a $10 billion bailout. Since that period, though, Dubai’s economy has grown 2.8 percent in 2010, 3.4 percent in 2011, and 4.1 percent in 2012, primarily due to the tourism, trade and transport industries. Unfortunately, growth in the one sector that decimated the Dubai economy – real estate – has been relatively slow.

Anyone who thinks that in light of this relatively slow recovery, Dubai’s rulers would retrench and ride out the storm, does not know Sheik Al Maktoum. Living under the mantra that Dubai does “not anticipate the future (but) build it”, the Sheik has thrown caution to the winds and announced new projects worth up to $50 billion. These include a $2.7 billion complex of five theme parks, a billion dollar replica of India’s Taj Mahal – the Taj Arabia – that will be four times larger than the original, the world’s biggest mall that will be built down the road from the huge Dubai Mall, 100 hotels, a theme park in collaboration with Universal Studios, and a green space somewhere in size between London’s Hyde Park and New York’s Central Park.

Dubai clearly cannot pay for these projects by itself as it continues to have a significant debt load – it borrowed $113 billion during its boom years and has to pay creditors over $9 billion in 2013 and $31 billion in 2014. Creditors also remain circumspect about future projects and several of Dubai’s companies continue to negotiate for better repayment terms. So who will fund these ambitious plans? The weak real estate market makes pre-selling these properties unlikely so that leaves banks and bond markets. The former – including domestic banks – are already overexposed to the Dubai market and continue to suffer from the economic slowdown. So it’s up to the bond markets then, and they are on a positive trend and could provide the necessary funds. However, I don’t believe the bond markets are impressed with the revenue potential of these projects to provide all the needed funds.

Obviously, this does not mean that Dubai won’t get the capital for some projects, just not for all projects. In this case, the emirates could do one of two things: it could scrap some of the more ridiculous projects or spread their development over a longer time frame, which, given the attention span of the Sheik, may well mean the end of those projects. I also remain skeptical about the revenue potential of these projects. Clearly, given the persistent weakness of the real estate sector, tourists – and their retail dollars – are the primary consumer target and this is a sensible idea because Dubai’s tourist boom has been consistently strong. On the other hand, are there enough tourists in the world to make projects of this size, scope and cost eventually profitable? While it’s easy to predict that these announcements are likely a public relations exercise and a number of them will be cancelled, what is more concerning is Dubai’s ongoing focus on becoming an entertainment haven; it’s like the great recession didn’t teach them anything at all!