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Dubai and its White Elephants
March 2010


On November 25, 2009, Dubai World, the wholly owned subsidiary of the Emirate of Dubai announced that it would request a 6-month standstill on all debt servicing starting December 2009. The announcement effectively gave notice that the company’s debt would be rescheduled. The announcement came on the eve of Eid Al-Adha holiday during which Dubai banks were closed from November 26 to 29. For these four worrisome days, at least to Dubai’s panicked lenders and investors, the company maintained complete silence.


What exactly is the size Dubai World’s debt is unclear. Transparency is not a trait of organizations in Dubai, or the wider Arab world. Estimates, however, put the company’s mountain of debt at around billion. As for the Dubai Emirate’s debt, estimates vary. The International Monetary Fund estimates Dubai has outstanding loans of 9.3 billion. These enormous sums were spent mainly on too many white elephant projects.


On November 30, 2009, upon returning from the Eid holiday Dubai’s financial chief said the Emirate is not a guarantor of Dubai World's debt. He maintained that the group's loans were obtained “on pure commercial bases”.


The following day, on December 1, 2009, the national day celebrations of the United Arab Emirates, Dubai's ruler declared: “Mixing up between the Dubai World group and the government of Dubai was wrong”. To add insult to injury, the ruler added, when asked about the reaction to Dubai world’s standstill request and restructuring plans: “They do not understand anything”.

Three weeks earlier, on November 9, 2009, the ruler of Dubai was even more combative. Sensing the financial hurricane about to engulf his emirate and to ingratiate himself with the very rich ruler of Abu Dhabi, he said: “There is no Dubai and Abu Dhabi, we are one… We will be there for each other when we need to… And I want to tell those people who doubt the solid relationship between Dubai and Abu Dhabi to shut up”. It is curious to observe that on January 4, 2010, upon the inauguration of the world's tallest building in Dubai, its name was changed from Burj Dubai to Burj Khalifa, in honor of the name of the ruler of Abu Dhabi, Sheikh Khalia Bin Zayed Al-Nahyan.


The conclusion from these statements is that, depending on the final outcome of the forthcoming rescheduling negotiations, lenders should be expected to agree to one or a combination of the following possibilities: Forgive a proportion of the original indebtedness, take an equity position in Dubai World’s schemes for a part of the loans, extend maturities, reduce interest rates, etc.


The manner in which the announcement of the “standstill” was made, just after the banks and all government offices were closed for four consecutive days during which no emirate official was available to respond to concerned bankers and investors worldwide reflects poorly on the professionalism of Dubai’s bureaucrats and leaders. Insults like, “they do not understand anything” and “shut up” are breathtakingly arrogant and disrespectful.


Stock markets around the world dropped precipitously. Investors everywhere, including U.A.E.  individuals and private and sovereign institutions, lost hundreds of billions of dollars. This story is not a great moment in the history of Dubai, the U.A.E. and the Gulf Cooperation Council.


Although, Dubai did not provide an explicit and irrevocable guaranty with respect to Dubai World's debt; thus, has no legal obligation to repay Dubai World’s loans, and despite the recklessness of the bankers who neglected to demand a guaranty, Dubai has, nonetheless, a moral obligation to pay up on time all maturing interest and principal. The issue here is not only legal. The issue involves that age-old famous Arab code—honour and morality.  Remember that Dubai owns 100% of Dubai World. Dubai’s ruler appoints, dismisses, holds accountable, and rewards Dubai World’s board of directors and senior management. In this case, honour and morality are superior to legality.


Abu Dhabi’s failure to expeditiously commit itself to a full rescue of Dubai is misguided too. Dubai’s ruler serves as the Prime Minister and Vice President of the U.A.E. As such, the U.A.E. has a moral obligation to protect the honour, integrity, and the good standing of the office of its Prime Minister and Vice President.


The Gulf cooperation Council is to be criticized as well. To be oblivious to the travails of a member of the Council reflects negatively on the standing of the Council collectively and individually. The international community will forever remember what this Council means and how it works (or does not work).