I.O.U.$85bn, Agora Financial visits Dubai and Abu Dhabi
It has been a pleasure over the past week to show two eminent US financial commentators around the UAE, Addison Wiggin and Chris Mayer, as they develop a deeper understanding of the recent developments in Dubai and Abu Dhabi. At least they will not now go away and write the sort of negative nonsense that the UK press now seems to have tired of printing.
Addison Wiggin is the executive publisher of Agora Financial and editorial director of The Daily Reckoning, the largest circulation newsletter in the world. He is also co-author of The Empire of Debt, republished this week and No14 bestseller on Amazon.com, and wrote the script for the successful film I.O.U.S.A..
He was accompanied by Chris Mayer whose newsletter Capital & Crisis is the group’s largest circulation specialist financial newsletter, and he also pens a monthly letter Mayer’s Special Situations
Fresh perspective
These two gentlemen from the USA wanted to make their own minds up about the UAE and its prospects, and so we largely avoided the government-run media. It is going to be fascinating to read their reports on Dubai and Abu Dhabi over the next couple of weeks as they have headed off to Mumbai this morning.
Addison also took away hours of video footage as his success with I.O.U.S.A. has given him a taste for documentary presentations, and it will be interesting to see what he makes of Dubai and Abu Dhabi.
In the case of Dubai the film might be entitled I.O.U.$85bn. Certainly there is a perspective to be drawn on the indebtedness of the city, and its dozens and dozens of abandoned construction sites.
Yes Chris and Addison appeared genuinely impressed by the opportunity represented by Dubai. Yes, the debt might be several times the city’s GDP. But then debt reached a similar multiple of GDP almost half a century ago when Sheikh Rashid first invested in The Dubai Creek as a deep water port.
Indeed, there is a long history of Dubai over-reaching itself with debt and then coming out on top. However, unfinished palm islands and plastic dinosaur parks are challenging problems, as are the almost-complete abandoned skyscrapers in the Dubai International Financial Centre.
Abu Dhabi F1
To balance this impression we headed off to Abu Dhabi and could see the Ferrari World and Formula One track almost ready for the big race. Lunch at the Emirates Palace included a drive past many other construction sites, most of them still active and sharing the road with a great deal more construction trucks than now ply the roads of Dubai.
It is of course hugely to the advantage of indebted Dubai that it has such a brotherly neighbor as oil rich Abu Dhabi. Support for the $10 billion lifeline-bond for Dubai from the UAE Central Bank has undoubtedly come from this source, and another $10 billion is due to be issued over the next couple of months.
Dubai will therefore be able to refinance with the implicit guarantee of its federal friends in Abu Dhabi. In fact, far from dismissing Dubai as a collapsed property bubble my visitors this week seemed very positive about the future.
They stayed in the newest hotel in Dubai, The Address Dubai Mall, and liked the new Downtown district around the Burj Dubai, already the world’s tallest building and set to open before the end of the year.
Ski Dubai
We also met crowds of shoppers in the Dubai Mall and The Mall of the Emirates which we accessed from the busy new Dubai Metro. We watched the skiers in Ski Dubai from the vantage point of a crowded Lebanese restaurant.
Even a tour of the Dubailand sites along the Emirates Road did not seem to dent their confidence, although I must admit my own has been sorely tested by the abandoned cranes and half-built buildings. Clearly this theme park is going to take a long time to finish.
But then my guests were rather astonished at how much had already been built. The Motor City, Sports City and Falcon City are all quite advanced. But a lot of clearing up remains and some of the bigger dreams have now become desert mirages.
At the Cityscape exhibition we saw the vision of the future of Jumeirah and Satwa which harked back to the boom days with a tower higher than the Burj Dubai as a centrepiece. Yet at a more practical level the redevelopment of villas for sale in this area makes good practical sense, and you almost wonder why this was not done before the second Palm Jebel Ali, now another abandoned construction site.
My new friends could see how Dubai will recover, even if as visitors for a few days they could hardly be expected to come up with a comprehensive blueprint.
For as a regional hub for trade, multinational headquarters, finance, tourism and aviation Dubai still makes excellent business sense. It has been the great business economics of these operations that has made the city rich and will do so again, even if the recession proves to be a double-dipper and there is more pain yet to come.
Actually there is a positive side to the property collapse as it has brought housing and office rents tumbling down, making Dubai a highly competitive business location again.
Cutting debt
And of course something will have to be done about that debt mountain. Some interests will have to be consolidated and some interests liquidated. And once the bad projects have been eliminated then investors will become interested again, most likely from the region and quite probably from Abu Dhabi in one shape or form.
What will emerge will be a chastened and more realistic Dubai. But then a great deal of the vision did get built in the boom. Going forward the creditors will be in the driving seat, one way or another, and professional management and realistic planning a requirement for new loans.
That is actually not a bad combination for future success: great urban infrastructure and new professional management, no doubt recruited from around the world to live in the UAE. Then the excellent business economics of the nation – with an enviable combination of zero taxes and high margins – can go to work restoring profits and paying off the debts in Dubai and making Abu Dhabi even richer.
