The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.
Dubai - self-styled bluing capital of the Middle East, night-club hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall - has gone pear-shaped. "It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."
The result may be a new business model for the emirate, one based less on debt and speculation. Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.
Big developers have started firing staff and paring projects, banks like Emirates NBD have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether. "Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.
Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch. Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing. Many had hoped that the six countries of the Gulf Co-operation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.