Dubai: Too Big to Fail

The recent gala opening of the Atlantis hotel on Dubai's Palm island gave one a strong sense the emirate's elite were fiddling while Rome burned. The sheets had hardly been stripped from the beds of the departing guests when the hotel's developer, the government-owned Nakheel Properties, announced that it was cutting 15 percent of its workforce. Dubai's economy, fueled by high oil prices and easy credit, has been hit hard by the same global contraction that has already hurt much of the world. But reports of Dubai's demise are premature, and those primed to write its obituary should hold fire.

First off, Dubai is just too big to fail. It is the second-largest economy in the United Arab Emirates and retains the backing of the largest, Abu Dhabi, which holds massive oil reserves of nearly 100 billion barrels and has a sovereign wealth fund in excess of $1 trillion. It's never been clear exactly how much of the boom in Dubai, which has no oil of its own, was subsidized by Abu Dhabi. Dubai officials insisted they did it all on their own. Whatever the truth, it's fair to say that Dubai is too important to the U.A.E. for its leaders to let it fall.

Until a few months ago, Dubai was well on its way to achieving its goal of $108 billion in GDP by 2015. Now it's embroiled in the global credit crisis, which has threatened the main source of its growth: construction and real estate. Dubai relied on easy financing to build the world's tallest building, its largest mall and any number of other grandiose projects. Then came the credit crunch and demands that payments be made on a multibillion credit facility. Dubai has been forced to turn to Abu Dhabi for help.

But that's something its big brother can provide. When oil was at $147 a barrel, Abu Dhabi's production of 2.7 million barrels a day earned it cash at a rate of $140 billion a year—not bad for a U.A.E. population of slightly more than a million. Now that oil's hovering below $50 a barrel, the revenue might fall to $45 billion a year—but that's still not bad for a population of slightly more than a million. Abu Dhabi's budget for 2009 predicts oil at $67 a barrel. Even at that rate, the government would reap a substantial surplus, and most experts predict that the price will actually be much higher by the end of next year.

All this means Abu Dhabi can well afford to support Dubai. Though no one has said so publicly, many believe that the ruler of Abu Dhabi promised to backstop Dubai's obligations for up to five years. That matters, but so does the fact that compared with many other parts of the world, and contrary to some reports, Dubai is not exactly overleveraged. With estimates of $80 billion in debt against $350 billion in real estate, even if the value of the property drops sharply, Dubai will never approach the levels of debt relative to assets that now afflict the United States and parts of Europe. Direct government debt in Dubai is about $10 billion on a GDP of about $65 billion. That's much lower than that of the United States, most of Europe or Japan. And most of Dubai's debt is owed by the corporate sector, which, though linked to the government, is nonetheless legally distinct.

It's not just Abu Dhabi's money that supports Dubai; so does that of much of the non-Western world, which has looked to Dubai as a haven from, and alternative to, the U.S. banking system. Dubai is also buoyed by commerce from parts of the globe that don't have an easy time dealing with the West, ranging from countries like Pakistan to Malaysia to the Philippines.

Still, Dubai's need to turn to its oil-rich neighbor has led to a crisis of confidence in what was, until recently, a swaggering society, and there's now plenty of fear that all those dreams and plans will end in tears. The risk is less that Dubai's finances will fail than that its bold vision will get lost in the same fog of anxiety that's blanketed so much of the world.

But the region, if not the world, still needs Dubai. Until a few months ago, the emirate was heralded as a shining example of the new Middle East, a turbocharged entrepreneurial place that offered a sharp contrast to the chaos and religious sectarianism of Iraq and the corrupt crony statism of Egypt. Backed by oil or not, Dubai sees itself as a bastion of the free market and a city of modern laws and modern mores in a region where those are in short supply.

Its boom may have been built largely on real estate—offices, golf courses and condos, mainly for foreigners, mostly from Arab states. But Dubai started its growth with a vision to became a global commercial center. That attracted capital and immigrants. Alongside Dubai's 200,000 citizens live 1 million expats, and for the foreseeable future, they have no better haven anywhere in the Middle East.

Unless Dubai and its endlessly innovative ruler, entrepreneurs and developers adjust their vision and once again approach their challenges as problems to be solved rather than absolute impediments, they may well sink into a prolonged period of stagnation. The fact that it can draw on the surrounding wealth of an oilrich world will probably insulate the emirate from the worst. But Dubai can do better than survive. Vision is what got Dubai to where it is, and vision is what will carry it through.