Dubai Goes Back To The Future

The world’s first underwater hotel. Rotating houses. Man-made mini universes. Just about anything went as long as it was the world’s tallest, biggest, fattest, slimmest, fastest, slowest or shiniest. I could be writing about 2006, or I could be writing about… this week.

Dubai’s Ruler, HH Sheikh Sheikh Mohammed bin Rashid al-Maktoum, has spoken in public for the first time in months.

And no he didn’t tell us that the economy is back on track, or reveal that the GCC is joining a single currency, or something of similarly hefty gravitas. He told us: Build that hotel! And build it bigger!

The world’s tallest hotel, the JW Marriott Marquis officially opened its doors to its first guests in Dubai earlier this month and Sheikh Mohammed gave the go-ahead for its second tower this week.

Dubai’s Ruler also announced plans for a huge tourism and retail development including the largest shopping mall in the world, as well as a $2.8 billion theme park – a fresh sign that the glitzy emirate has dusted off its knees after a crippling corporate debt crisis three years ago.

It all sounds rather like the massive Dubailand project, which didn’t go ahead in the end and stands marked by a sun parched lone door.

And while Dubai has certainly been vivified this year with growing tourism and services exports, is it really time to be jumping back on the colossal credit wagon? And who these days has close to $3 billion?

As one burned investor tells me: “Do they imagine the same local guys who lost money last time will be back with their chequebooks? Many lost their lifetime savings on mega projects.”

In a world where global liquidity is squeezed (most of the funding for Dubai’s failed projects came from European banks) and local central bank regulations are tight, it’s difficult to see where the companies will find the cash. Dubai government yields have fallen, so Sukuk may be an option but still not for the billions needed for these projects.

It’s hard to believe we’re only three years on from Dubai’s hard billion-dollar lesson. Lest we forget, the emirate, like the rest of the world, almost came to an economic standstill in 2009.

As I wrote several months ago Dubai Is Back, as evidenced by tourist arrivals, which grew 10 per cent and hotel revenue which rocketed 19 per cent in the first half of 2012.

Some state-linked companies have made progress working through their debt loads, while property prices have started to rebound in some areas. Passenger traffic at Dubai International Airport will exceed 50 million people this year and the airport is being expanded.

Make no mistake, while Dubai is semi-healed, there are economic spectres looming on the horizon. A report issued by Moody’s Investors Service earlier this month said that the outlook for the UAE’s banking system remains negative.

The report cited asset quality challenges, especially for the Dubai-based banks and low provisioning coverage levels.

“Moody’s expects problem loan levels to remain elevated, driven by exposures to large, stressed, government-related issuers (GRIs), and legacy corporate impairments, primarily real-estate-related, which are still emerging after failed attempts to restructure earlier in the crisis,” the report said.

We will have to wait to investigate the timelines for these ambitious new projects and also keep an eye on the funding methods.

HSBC’s chief economist Simon Williams tells me ‘oxygenated blood has started to pump through the UAE. 2012 is the year where things picked up’ – that’s great, but it’s really not a reason to go and do it all again.

Alicia Buller is the editor of Gulf Business