Is Dubai’s Party Over?

As with so much in the interconnected world economy, the ripple effects of the current crisis keep spreading, exposing some of the more unpleasant facets of the Dubai dream. Layoffs, which have already begun, will have an impact not just in Dubai but also in the working-class neighborhoods of Manila and Mombasa and Thiruvananthapuram that sent their workers to the gulf. Thousands are expected to leave when the holiday season is over, with little fanfare. The guest workers' invitations can be revoked any time, so few complain—but bitterness is widespread. Meanwhile, prices for houses and apartments still on the drawing board have dropped almost 50 percent in some areas, mortgage money is simply frozen, and major projects are stalled or being scaled back. Rumors abound that Dubai may have to sell a substantial stake in Emirates Airlines, the national carrier that's vital to keeping it connected to the outside world. And in a business culture built on inside dealing, the official denials of such a sale have had little credibility out on the street.

The sense of uncertainty and fear has grown so much that even in Dubai's famous gold souk, which was a center of trade long before the word "globalization" was invented, there's now a pall of confusion. "Not only are gold prices dropping," says Firoz Merchant, the owner of one of the shops. "Everything is uncertain and moving in different directions." As if to underscore the gloomy mood, last month the Dubai Marina suddenly started filling up with excrement. Apparently many buildings in the city can only dispose of their wastewater by having it trucked to a treatment plant. But the drivers got impatient with long lines and started pumping it into storm drains that led straight to the sea.

In an effort to restore confidence just days after the Atlantis resort blowout, Dubai announced the creation of an "advisory council" headed by Mohamed Alabbar, the chairman of Emaar Properties, which is building, among many other projects, the tallest skyscraper in the world in the heart of the city. Emaar's stock price, it is worth noting, has plummeted more than 80 percent this year, and the sale price of luxury apartments in the hyper-high-rise has dropped by 40 percent.

"Here in Dubai we are realists, and we are also optimists," Alabbar told a forum at the Dubai International Financial Center on Nov. 24. To reassure his audience and the world he promised transparency, a rare concept in Dubai, and addressed the question of the emirate's debt, long rumored to be astronomical. Alabbar said the government and its many affiliated companies had obligations of $80 billion, but assets of $350 billion. "Let me therefore state categorically: the government can and will meet all its obligations going forward."

Such semi-official figures have never been made public before and their details have still not been divulged. So neither the liquidity of the assets nor the basis for their valuation is clear, and it's hard for analysts to judge just how realistic Alabbar's optimism is. "The important thing is not to focus on Dubai's assets and liabilities, it is about moving forward to rectify the situation," says Mushtaq Khan, an economist at Citigroup who authored a recent report on the Gulf.

If there is good news, it's that Dubai's leaders were quick to take some corrective measures in the earlier stages of the crisis. In September and October, the Central Bank implemented a $32.7 billion plan to support the country's financial institutions. Alabbar announced last month that the two main home-mortgage lenders, which had run out of money, would in effect be nationalized. And he promised that the three largest developers in Dubai, which control about 70 percent of the supply on the real-estate market, would work together to keep it under control. The crash of the moment is really "a healthy correction," he said.