Dubai risks being a mirage in the desert

If AS recent as 2006 some 25 per cent of the world's building cranes were operating in Dubai, the state is now rushing quite a different form of construction as bankers, investors and lawyers converge to reconstruct the massive debt owed by its investment holding company, Dubai World.
Magnificent Dubai was once a wonderful idea. One incorporating a 1-km tall hotel, rows of glass towers, a palm-shaped man-made island for the rich and famous and a mind-boggling ski slope in the middle of the desert. Never Never Land was kids' stuff.

The expatriates came in droves to bask in Dubai's glory. From glib-talking investment bankers and consultants to professional golfers and footballers, they stamped their mark of approvals and called Dubai home, confident of its bright future.

In those glorious years Dubai's strategy was as shrewed as it is now reckless on hindsight. If it did not have it, it would just buy it.

It even attempted to buy its own ecological system, spending billions of dollars to aerate well-manicured lawns which otherwise would not survive in the dry desert, billions more to produce snow on the artificial ski slope, and even more billions to build super-expensive artificial islands visible from outer space.

There is nothing wrong with that, except in Dubai's case, going overboard seems an understatement.

Throughout history nature has often proven to be an insurmountable obstacle, period.

And indeed throughout history too, being excessive has often led to failures. Even more dangerous when such excesses are financed by borrowed capital.

But as reality sinks in from a week ago, it now faces the danger of becoming just a mirage in the desert.

Things did not go wrong in Dubai only last week. The writing was on the wall from as early as 2006 when analysts were already talking about a bubble building up in the emirate state.

Dubai had great ideas, no doubt about that, and for a while it was the centre of attraction for all things in the emirates.

But underneath the grand plans, Dubai is also a very bad example of economic risk-taking.

Still, however, everybody including the international financiers and investors ignored the perils and together celebrated Dubai's dreams, forgetting one vital risk - its relatively weak real economy.

Dubai's oil reserves have dwindled to negligible levels, it is not a major exporter of goods and has been practising the dangerous economic strategy of attempting to create an artificial economy using borrowed capital.

In building its future largely around just the property and tourism sectors and minus a strong real economy, it was imminent that Dubai committed itself to the mistake of overly exposing its economy to external elements far beyond its control. The global credit crisis was the bombshell.

After the extent of the problems faced by Dubai World were known last week, the dreams are fading as fast as the once-confident expatriates are now buying their one-way tickets out of the emirate.

Now, only the bankers, financiers and lawyers are the ones with eyes trained on Dubai as they began to restructure Dubai World's mammoth debts.

They may succeed since after all the crisis is still contained as largely a huge real estate deal turned bad and not yet a full-blown sovereign default.

But it is too early to see what the future really has in store for Dubai. Perhaps the most the bankers, financiers and investors can do now is to look back and, difficult as it may be, acknowledge that it was also in part due to their failures that the perils were ignored.