Dubai faces hard times

How did Dubai become so rich?

Petrodollars. Fifty years ago it was just a small trading port and pearl fishing town - one of several little city states on the Persian Gulf to gain independence from the UK in 1971. Along with Abu Dhabi and the five other sheikhdoms that went on to form the United Arab Emirates (UAE), it was transformed by the discovery of oil in 1966. In the ensuing decades, it attracted a stream of foreign workers and investment, but by the mid-1990s people realised that, unlike Abu Dhabi, it would run out of oil within 30 years. So began the extraordinary project, masterminded by then crown prince, now ruler, Sheikh Mohammed bin Rashid Al Maktoum (see box), to reinvent the city as an international hub of finance, trade and tourism, no longer reliant on oil revenue. 

And was it successful?

Spectacularly. Huge building projects funded by the emirate (in the boom years, 25% of all the cranes on earth were in Dubai), and an inviting business climate (eg zero income tax) ensured a decade-long boom. Dubai’s GDP grew from $12bn in 1996 to $80bn last year, and with it a vast influx of 3.62 million expats: bankers, lawyers, architects, property developers from the West (100,000 of them from the UK); building workers, cleaners and servants from the East. Foreigners soon formed some 90% of the population. Dubai became famous for its pleasure domes: the Palm Jumeirah - an artificial island fanning out into the Persian Gulf that has attracted a clutch of celebrities, including David Beckham, Michael Schumacher and even, it's said, Afghan president Hamid Karzai; the Burj Dubai, an unfinished 160-storey skyscraper that is already the world’s tallest building; and Ski Dubai, 22,500 square metres of desert covered with snow all year round. But dozens of other projects - including the even taller Nakheel Tower and an $800m Donald Trump complex - are now either on hold or have been scrapped altogether.

Did Dubai expect to withstand the financial crisis?

Yes, and until last autumn it seemed relatively unscathed by it. By the end of the year, however, it was clear that the property industry, accounting for 30% of the economy, was on the slide. Property prices have fallen 25% on average since September, with homes on Palm Jumeirah down 50% to 60%. Morgan Stanley reports that in recent months $260bn of property projects have been binned or delayed. And all this has been exacerbated by the departure of thousands of expats. Hundreds of cars bought with cheap credit have reportedly been abandoned at the airport, keys left in the ignition, frozen credit cards and apology letters in the glove box.

Is the car story really true?

Dubai's police chief says only 11 cars have been dumped at the airport and rebukes the media for misreporting the facts. But no one believes him. Expats and airport officials confirm a Gadarene rush of people trying to get out. In Dubai, and across the UAE, it's now hard to tell fact from fiction, the more so since a proposed new media law will make it a crime, punishable by fines of up to 1 million dirhams ($272,000), to damage the country's reputation. Already it may be affecting people's willingness - financial analysts as well as journalists - to report the crisis. So rumour flourishes. There are even tales, reported by the New York Times, that Palm Jumeirah is sinking and that cockroaches are coming out of the taps of its seven-star hotel.

Why are so many people leaving?

Expats in Dubai who lose their job also lose their visa and must leave the country within a month. Since defaulting on debt is illegal, punishable by jail, expats who can't pay the mortgage know flight is the safest bet. But worst affected are the thousands of construction workers from the Indian subcontinent, who earn as little as £70 a month working on desert building sites and are now being laid off en masse. Many have borrowed big sums, some at nearly 100% interest, to secure jobs and visas: many communities in India are dependent on their earnings. The Indian embassy has reportedly block-booked planes in March to fly 20-30,000 people back home.

Can anyone get Dubai out of this mess?

Yes. Dubai's current debt level stands at $80bn, more or less the same size as its entire GDP in 2008, and according to Moody's, the ratings agency, Dubai's mostly state-linked companies need to refinance about $15bn in debt before the year's end. But fortunately for Dubai, its much richer and more conservative neighbour, Abu Dhabi, has nothing like that kind of debt and has a sovereign wealth fund of more than $300bn to play with. So together with the other members of the UAE, it is bailing out the prodigal emirate, buying $10bn of Dubai’s bonds to help it through the year, with another $10bn on hand if needs be.

And what might be the long-term effects of that?

Most analysts see it as an opportunity for Abu Dhabi to reassert its dominance over the UAE and rein in its upstart cousin. While Dubai insists that the bail-out came with no conditions, few observers agree. "Abu Dhabi is lending its credibility to Dubai," says Eckart Woertz, an economist at the Gulf Research Centre. "Most likely this comes with strings attached, with a price tag." Rumour has it, for example, that Abu Dhabi has demanded Emirates Airlines, one of Dubai's crown jewels, as part of the deal. Many think the price could be much greater: that Abu Dhabi will unpick Dubai's independent foreign policy - the city has fostered close links with Iran - and its mission to become an independent, global city. But optimists insist that the Gulf still needs Dubai - its port, energy, quality of life - and that the economy will weather what may be only a moderate two-year recession. Besides, there are still enough building projects in the works to rival the size of the entire US stimulus package. ·