Sunday, October 11, 2009 2 comments ++[ CLICK TO COMMENT ]++

Dubai may need a bailout

The Globe & Mail, via a Reuters story, is reporting that S&P is concerned that Dubai may be insolvent:

Dubai has “insufficient” funds to pay back billions of dollars worth of debt coming due, an analyst at credit rating firm Standard & Poor's said Sunday, putting added pressure on the struggling city-state to raise additional cash.

The sheikdom and its network of state-controlled companies amassed at least $80 billion (U.S.) in debt on projects like manmade islands and opulent high-rises during a multiyear building boom that saw the city-state craft itself into the Middle East's financial, trade and tourism hub.

About $50 billion worth of that debt needs to be covered over the next three years, said Farouk Soussa, S&P's head of Middle East government ratings. A lack of government information has left investors wondering how it all will be repaid.


I haven't mentioned Dubai in a while given the crises that have unfolded elsewhere but it looks like the Dubai boom, largely driven by real estate and attractions targeted at wealthy individuals, may have been fictitous wealth creation. One positive thing is that construction projects have a long lifespan and can be used in the future (assuming they don't become obsolete or too expensive to maintain.) However, a big negative for Dubai is that a lot of residents are foreigners who can easily flee the country, never to return. In such a case, there may be huge overcapacity in real estate.

Overall, Dubai won't completely implode because UAE will come to its rescue. Unfortunately, such a rescue will have big political implications. Dubai is socially more liberal (although nothing like the West or Latin America) whereas the leaders of UAE appear to be socially conservative.

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2 Response to Dubai may need a bailout

synchro
October 15, 2009 at 10:39 PM

Haven't checked in w/ you blog for a while, but it seems YMM had a nice puff piece in Barron's.  Way to go!

Sivaram Velauthapillai
October 16, 2009 at 8:28 PM

He was down something like 70% early in the year but is up 30%. What's that? Up 300%+? Even you couldn't accomplish that ;)

Up 300% from the bottom... another 1500% to go to get back to even ;)

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