As the old saying goes: “In the midst of life, we are in debt”, and never was this more true than now. The state of having a financial obligation to somebody else is such a commonplace these days that the old fiscal rectitudes have gone for good, replaced by a willingness to pile on the debt in all aspects of life.
We drive from our mortgaged houses in hire-purchase cars fuelled by credit-card petrol on bond-issue roads, and never give it a second thought. Even before the credit crisis – itself sparked by the mismanagement of debt on an enormous scale – the natural tendency of consumers was to load up with credit (the mirror image of debt) in all its forms.
The bursting of the credit bubble has left the world struggling with a debt mountain that will take generations – our children and grandchildren - to pay off. Nobody believes the poor things will ever actually pay it. They will just get used to having even higher levels of personal debt even than us, and pass that on to their offspring in turn.
From the micro to the macro, the debt phenomenon is universal. As individuals have got used to debt-dependency, so governments will also have to adjust to the new financial morality. And none more so than Dubai.
The very first US Treasury Secretary, Alexander Hamilton, said a couple of hundred years ago: “A national debt, if it is not excessive, will be for us a national blessing.” Back then, he saw the benefits countries, like individuals, could derive from having access to debt funding: instant access to investment funding for a new and growing country as the US then was. The important codicil – “if it is not excessive” – is the crucial point.
The senior echelons of Dubai Inc must be pondering these considerations right now, as they grapple with the emirate’s most urgent financial issue: how to deal with the enormous levels of debt that have arisen from the global financial crisis.
The credit crunch caught Dubai midway through an ambitious growth plan, funded partly by the legacy of oil wealth, though more significantly by a far more traditional system of licensing, rentier revenue and profit sharing. This was accelerated further in the early 21st century by access to cheap capital from the international markets – debt, to you and me.
The end of the global party of cheap credit has left Dubai with a big hangover. Exactly how big has become a matter of acute conjecture in the past couple of weeks, as international lending institutions attempt to put a figure on the emirate’s overall endebtedness.
For most of the past year, the figure of $80 billion has been accepted as the benchmark for Dubai’s debt, but now that is being queried. Some analysts have suggested it has gone up a few billion to around $84 billion, others say it could be as high as $150 billion.
It’s worth looking at how the original $80 billion estimate came about. It was first mentioned almost impromptu by Mohammed AlabarMohammed Alabar, chairman of Emaar, in a speech at DIFC week last November. Maybe not the place for such an important pronouncement, but at least worried financiers had some guidance.
It was later reaffirmed by Nasser Al SheikhNasser Al Sheikh, then head of Dubai’s finance department, in the emirate’s first attempt at a transparent budget back in January. He set it in context with a detailed explanation: it comprised $10 billion of government debt, with a further $70 billion of debts from government-related enterprises (GRE). On the credit side of the balance sheet, he identified government assets of $90 billion and GRE assets of $270 billion.
The message was as clear as could be in the opaque world of Dubai public finance: the debts were big, for sure. In fact, they amounted to some 140 per cent of the emirate’s GDP. But they were far outweighed by the emirate’s assets. Reassurance all round.
Doubts about the reliability of the $80 billion figure have been rising for weeks. When the UAE central bankUAE central bank backed a $10 billion bond issue in February, some analysts simply subtracted that from the $80 billion, though of course the bond should in fact have been added to Dubai’s liabilities.
Another issue was – and remains – the status of Dubai Holding, the huge conglomerate owned personally by Sheikh Mohammed bin Rashid, ruler of Dubai. Were its considerable liabilities included in the original $80 billion estimate? Al Sheikh back in January seemed to suggest they were not. There has been no further clarification on that important question since then.
Most disturbing of all was the statement to Nasdaq Dubai recently to the effect that Dubai WorldDubai World, the other big GRE, had liabilities of nearly $60 billion. If Dubai WorldDubai World accounted on its own for such an amount, surely the overall level of endebtedness must be much higher, some analysts argued, even as much as $150 billion if Dubai HoldingDubai Holding is included. At that level, Dubai’s debt is testing the parameters of Hamilton’s rider: “if it is not excessive.”
Maybe the exact figure is not that important. Debt only becomes an issue when it has to be repaid suddenly, and perhaps Dubai can manouevre its way through a long-term repayment and rescheduling process over the next few years, fuelled by a recovery in the world economy and a resumption of the Dubai growth strategy.
But I suspect Dubai, like all of us, is going to have to learn to live with, and even love, its debt mountain for years to come.
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Community Comments (1)
The important thing to consider in assessing the debt in any country is to find out how much contribution it makes to the GDP. There was the time in US when 1 dollar of debt made a contribution of 3 dollars to GDP. However the case has been reversed as of now. Debt does not make any contribution to GDP in US as of now. Similarly in Dubai debt has been mainly incurred to expand the real estate capacities that contributes only 8-10%of UAE's GDP and with the decrease in the real estate prices there was always a liklehood of credit crisis emerging in Dubai. This also have an effect of having the deflationary forces strengthening in Dubai.
The important thing to consider in assessing the debt in...
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