Momentum in the spendthrift emirate certainly looks to be grinding to a halt. Last week, Dubai received a $15 billion (Rs70,350 crore) bailout from Abu Dhabi, its cash-rich big sister. At least that’s how the lending facility set up by the United Arab Emirates (UAE) central bank is being privately interpreted. It’s just one of a number of warning signs.
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A year ago, Dubai was running at full speed. Everything was going up, fast cranes, new buildings, property prices. Such was the froth, bankers in London were using their bonuses to speculate on Dubai’s luxury water front condos, buying one week and selling the next. But now that’s an unprofitable game.
Dubai has caught the credit cold. In just three months, the spread on Dubai’s credit default swaps have doubled to 300 basis points—to almost three times that of Abu Dhabi.
It’s no secret Dubai is resource poor, with just 6% of its gross domestic product (GDP) coming from oil and gas. Yet while none of the UAE states have official credit ratings, global banks have until now freely granted credit to Dubai.
In the downturn, commodity-scarce Dubai is being forced to face financial reality. Lenders no longer assume its state-backed entities are so credit worthy, construction of the world’s largest airport is rumoured to be behind schedule, and other large island projects postponed.
No-one is yet suggesting Dubai will collapse under its debt strain. Despite sibling rivalry, it’s understood Abu Dhabi would always act to avert a crisis. But last week’s lending facility serves as a clear whisper down the corridor telling Dubai to slam on the brakes.