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Over the past couple decades, Dubai has transformed itself from a backwater to a mega-money global phenomenon, with palm-shaped islands, an indoor ski resort and the world's tallest building. GlobalPost's Dubai correspondent Tom Hundley talks about the high-flying city's recent crash.
Mist shrouds the upper strata of buildings under construction near the Dubai Marina in 2007. Much of the city's new real estate remains vacant. (Photo by Steve Crisp/Reuters.)
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Below is the transcript of the Correspondent Call with Tom Hundley.
Passport: Good afternoon and welcome, its Thursday Dec. 3. I’m David Case, Editor of GlobalPost Passport in our Boston newsroom. Palm-shaped islands, an indoor ski resort in the desert, Sharia-compliant investments. In recent years, Dubai has become more than just a boom town. Now it’s melting down. Today we’ll discuss the latest in Dubai’s credit crisis and the marvel that is this global Emirate on the Persian Gulf. On the phone with us is Tom Hundley, GlobalPost’s Dubai correspondent. He joins us today from Poland. Hello, Tom.
Tom Hundley: Hello.
Passport: Before we begin, I have a few announcements to make: first, remember that the call is being recorded and will be posted on Passport’s website. As usual, I will lead a Q and A that will last about 20 minutes. If you’d like to ask a follow-up question on the topic that we’re discussing, please feel free to jump in. Currently, your lines are muted. To un-mute yourself, press *6. We ask that you identify yourself and please be mindful of the time. We also have about five or ten minutes at the end of the call for unrelated questions.
Ok, so, Tom, tell us: is Dubai going to go belly-up?
Hundley: No, I don’t think so. In many ways, what we’ve seen over the past week is a gross over-reaction by world financial markets, an indication of just how jittery the financial markets are these days. When Dubai announced its little problem last week, the stock markets around the world lost far more value than the $59 billion debt that Dubai is hoping to restructure. That’s not to say that Dubai doesn’t have a serious problem. Or, more specifically, Dubai World, that’s the giant conglomerate that’s the investment arm of the Dubai government. But you have to keep in mind that Abu Dhabi, the real financial power in the United Arab Emirates, has a sovereign wealth fund that’s worth $400-$700billion. They could write a check tomorrow to cover Dubai World’s debt.
Passport: And will Abu Dhabi come to the rescue? And tell us, what exactly is the relationship between Dubai and Abu Dhabi?
Hundley: To answer the first question, most people think yes, Abu Dhabi will come to the rescue. It can’t afford not to. A default by Dubai World would do so much damage to the UAE’s collective reputation as a sound investment place that Abu Dhabi has to get involved. Here’s what’s happened so far: Abu Dhabi has been silent on Dubai World’s problems. I think its letting it twist in the wind a little. But Abu Dhabi has said it will stand behind the banks, both local and foreign, that are exposed because of Dubai World’s problems. So there won’t be a run on the banks. Meanwhile, the government of Dubai is distancing itself from Dubai World, says it’s not responsible for Dubai World’s debts. Which seems to me a bit of a stretch, since it owns Dubai World. I wish I could think of a good analogy. Maybe like the White House saying it won’t be responsible for the Pentagon’s debts. What most people here seem to think is that, yes, Abu Dhabi won’t let Dubai fail. But they think that Abu Dhabi will use this opportunity to reign in Dubai. To force it to curb it’s free-wheeling, Western ways. Put pressure on it to behave like a proper, conservative, Islamic society. Abu Dhabi is no Saudi Arabia, but it is conservative. It frowns on alcohol consumption in night clubs and the other decadent habits that Westerners have supposedly brought to Dubai. It’s also unhappy with Dubai’s many business links to Iran. So, to answer the second question, the relationship between Dubai and Abu Dhabi: right now, the UAE is a loose confederation of seven Emirates, dominated by the two largest, Abu Dhabi and Dubai. The kind of cordial, bi-polar power-sharing arrangement between two tribes. What may happen is that Abu Dhabi, which is really the financial powerhouse of the UAE, will take this opportunity to clip Dubai’s wings a little bit and use its centralized power around its ruling family. And I think the rest of the UAE would not be unhappy with that arrangement. Remember, we’re talking about tribes and clans that are only a generation removed from their Bedouin roots.
Passport: Who is in charge in Dubai?
Hundley: The Maktoum family. Or more specifically, Sheik Mohammed bin Rashid Al Maktoum. His title is Ruler of Dubai and Prime Minister of the UAE. He is also effectively the CEO of Dubai. Sheik Mohammed’s counterpart in Abu Dhabi is Sheik Khalifa bin Zayed Al Nahyan, whose title is Ruler of Abu Dhabi and President of the UAE. So the style of governance in the UAE is a kind of mixture of corporate and tribal and generally it works very well. The key element that makes the system work is that the leader is respected. He must be respected, he must be seen as fair-minded and his financial probity must be beyond question. It’s a highly personalized system. And while the outside world is not privy to how the Maktoums and Nahyans really feel about each other, they are not in the business of undermining each other or cutting each other down in public. Whatever rivalries there are, they play out behind closed doors. And in the interest of full disclosure, I may mention that I’m a teacher at the Mohammed bin Rashid School of Communication at the American University in Dubai. I’ve never met Sheik Mohammed, but he seems to be a very capable leader who understands his role. And unlike the investment banks on Wall Street, he’s in it for the long haul.
Passport: Ok, so if Dubai’s debt crisis really isn’t such a big deal, why all the fuss in the financial markets?
Hundley: I think because the financial markets are not convinced we’re out of this recession. They’re worried about a double dip; they’re waiting for the other shoe to drop. And when Dubai World announced its debt restructuring, the world financial markets thought they heard that other shoe falling.
Passport: How did Dubai get itself into this mess in the first place?
Hundley: You know the guy in Las Vegas who makes $40,000 a year and owns a $1 million house because the bank loaned him the money? And then he takes out a second mortgage to buy a boat? Well, that’s Dubai. Unlike Abu Dhabi, Dubai has very little in the way of gas and oil resources. A generation ago, it made a very shrewd move and reinvented itself as a transportation hub. And that’s worked out very well. I’m referring to the Jebel Ali container port in Dubai and Emirates Airlines and things like that. More recently, it turned to property speculations and that worked out great for a while, back when oil was around $150 a barrel, there was a lot of cash sloshing around the region in Saudi Arabia and Iran and real estate seemed like the perfect place to park it. Contractors couldn’t put up buildings fast enough. Living in Dubai, you hear stories about units and luxury apartments being flipped two or three times before the building is even finished. The famous palm islands that you mentioned? Not all the units on the first island were occupied and they started building two more even bigger ones. But the property bubble has burst. You drive down Sheik Zayed road, that’s the main drag in Dubai, and its lined with spectacular buildings. High-end office buildings, luxury apartment buildings. Most of them are empty. And that’s why Dubai World is in trouble.
Passport: How do you see Dubai getting out of this mess at this point?
Hundley: Well, Dubai World’s portfolio contains a lot of valuable stuff. The port operations business in Dubai and all over the world, the royal Turnberry golf course in Scotland, the QE2, the big problem is property investments in Dubai. Dubai is grotesquely over-built. I mean, I’m not a real estate expert, but just looking at the number of empty buildings, it looks to me like it’ll take a decade for demand to catch up. Especially since Dubai’s population is contracting, not growing. So the party’s over in Dubai. I think it has to forget this idea of becoming a play ground for the rich and famous in the Middle East, this destination for billionaires. I mean, that was never realistic. You look at the physical attributes of the place: it’s incredibly hot, flat, desolate, barely a drop of water; it’s the kind of place where you might think of building a penal colony, not a seven-star resort. I think Dubai has to get back to basics. A regional transportation and services hub.
Passport: You mentioned all these empty buildings and half-finished buildings. What happens to them?
Hundley: Yeah, good question. I think a lot of them will stay unfinished for a long time. And the flip side of the question is what happens to the tens of thousands of construction workers, mainly from the Indian sub-continent, who are building those buildings. A normal country that experiences this kind of economic contraction is stuck with a high unemployment rate. And it has to provide some kind of benefits to the unemployed. And this makes the recovery hard. Dubai just sends these people home. Its India’s problem or Bangladesh’s problem.
Passport: You also talked about Emirates Airlines. I remember the early 1990s before Dubai had really come of age, you could get a cheap flight to Asia on Emirates and to sweeten the deal, to get you to actually fly on the airline, they’d throw in a night in Dubai and a tour of the city. Now, Emirates is a major international carrier and apparently a pawn in the current crisis. How did the rise of Emirates play into Dubai’s emergence? And what will happen to Emirates Airlines as a result of this crisis?
Hundley: Emirates Airlines is one of Dubai’s crown jewels. The airline, as I understand it, is still very profitable, it’s still in the top ten of everything in the airline business, and it’s owned by the Dubai government, which means the Ruler’s uncle is the Chairman. But Emirates Airlines is not part of Dubai World, which means it’s somewhat inflated from the current crisis. But there has been a lot of talk that control of Emirates Airlines might be Abu Dhabi’s price for bailing out Dubai. But I do not know. Abu Dhabi, I think about five or six years ago, started its own airline, very similar to Emirates, Etihad, they’re a very high quality airline, but my understanding is it hasn’t been profitable yet, although it’s projected to make a profit within a year or two.
Passport: Let me remind listeners, if you do want to jump in and ask a question, you’re welcome to do so. You can un-mute your phone, again, by pressing *6. Do we have any takers?
Caller 1: This is David Reedle, I have a question about Abu Dhabi’s price?
Passport: Go for it, David.
Caller 1: I wonder if, perhaps, in addition to demanding a stake in Emirates if they might demand that Dubai forget about its aspirations to be a global financial hub and really take that onto themselves?
Hundley: That might be the end result of this, without Dubai even explicitly stating it. The money is in Abu Dhabi. That’s where the Emirates wealth is. It’s just 100 miles up the road. That could very easily happen, yes.
Passport: How would Abu Dhabi deal with that? Are they comfortable with the international community arriving on their doorstep? That that would bring?
Hundley: It’s already there. All of the big banks are there. I mean, it wouldn’t be any drastic change. And I think the banks and the expats, really, keep it more comfortable in Abu Dhabi. The laws seem a little more coherent. In terms of the kinds of legal services that you’d expect from a 21st century nation-state, I think they’d actually be happier in Abu Dhabi.
Passport: Any other questions David, or anybody else?
Caller 1: I guess my thoughts on that is that those apartment buildings in Dubai are going to stay empty for a long time.
Hundley: Yeah, I think you’re right. I think they are, yeah.
Passport: And they haven’t completed the world’s tallest building yet, have they?
Hundley: The opening is now scheduled for early next year. January 4, I think. It’s up. And it’s not quite landscaped yet and I haven’t seen the inside, I don’t know if it’s fitted yet, but I know the opening date is quite soon. It’ll be another big splash, classy, A-list celebration for Dubai. It’ll be interesting to see if they can pull it off.
Passport: Do they have many tenants at this point?
Hundley: Good question. I don’t know.
Passport: There’s not a lot of transparency for that kind of thing.
Caller 2: Tom and David, hi, it’s Bill Mitchell.
Hundley: Hi Bill, how are you?
Caller 2: Good, good to connect with you. Can you tell us a little bit? How long have you been in Dubai? And what else is on your list? What are you going to be writing about soon?
Hundley: Well, I’ve only been there since August. But, I’m pretty familiar with the region, having been a correspondent there in the Middle East for four years for the Chicago Tribune. What’s on my list there in Dubai is I’m going to try to develop an energy beat for GlobalPost.
Caller 2: And what brings you to our mutual stomping grounds of Poland?
Hundley: That’s right! Well, Poland has always been a favorite of mine. I was the Tribune’s correspondent here in the mid-90s, a very interesting time, five years after the wall went down and the beginning of the Balkan wars. I’ve always just been drawn to the place. After Warsaw, I went to Rome, but I kept coming back and covering Eastern Europe. And I’m here now, one, for a GlobalPost story on energy, I’m going to write something about the Nord Stream project, which is the pipeline deal between Russia and Germany and which the Poles call Ribbentrop-Molotov two. And I’m also here on a book project.
Passport: Tom, I wanted to ask you how this Dubai World story is playing out locally in Dubai.
Hundley: Very quietly. There’s a new draft press law that says you can’t write anything that harms the economic wellbeing of the country or you go to jail. So it’s a very tricky story for the local newspapers to report. Mostly, they’ve been megaphones for the ruling family and the storyline is that everything is fine, the situation is under control, trust our wise leaders. And there’s been a lot of criticism of the foreign media for supposedly making stuff up and exaggerating the problem. But, I think most people here know the score. With the internet, information is hard to keep out.
Passport: Right, the old “blame the foreigners.”
Caller 2: Tom, has there been a distinction in the coverage between a start-up like The National in Abu Dhabi that presumably has been given some license to be a bit more independent, and some of the longer-standing media outlets?
Hundley: Yeah, you know, since I’ve been travelling this week, I started looking to The National to see how that would play it. Because they are much feistier than the old-line English-language newspapers in the region. And the funny thing is, its website disappeared for a day and I don’t know the reason. And it’s back up now, and it’s really been soft-pedaling the story, I’m quite surprised.
Passport: How is the expat community in Dubai weathering the financial turmoil?
Hundley: Well, it’s shaken up the folks who have lost their jobs, that’s for sure. But, other than that, not really much. Dubai is a place that’s really loved by the people who live here. People come to Dubai to make a buck. About 85 percent of Dubai’s population is expat. And the local “Emiraties” are afraid of getting swamped, understandably. So the Dubai government doesn’t give the expats a real stake in the country. We’re all here temporarily and when things get really bad, we pack up and go home.
Passport: And I understand you can go to jail in Dubai for doing things like bouncing a check or defaulting on a loan?
Hundley: Yes, that’s true and it’s a real problem. The custom here is to write a series of post-dated checks for your rent or as collateral for a loan so if you lose your job and can’t pay, you’re thrown in jail until you do pay. The idea is that this will force your extended family to make good on the debt. And that may work in a traditional society, it may work for locals, but it definitely does not work for Western expats.
Passport: Ok, can you talk about Islamic banking? What role does it play in Dubai’s crisis? We can’t call them bonds, but these bonds are not being paid in the coming weeks is apparent a Sharia-compliant bond.
Hundley: You’re right, we will soon find out. The first of Dubai World’s obligations that becomes due on Dec. 14 is a kind of Islamic bond and there’s not much precedent in how bad loans are handled in the Islamic finance system. The key element in Islamic banking is that you can’t charge interest. So how do you account for the value of money over time? It’s kind of like an immutable law of physics. Basically, you do charge interest, but you call it something else, like profit. In a conventional mortgage, the bank lends you money to buy a house, and you repay the loan with a massive amount of interest. And until you finish repaying, the bank really owns the house. In the Islamic system, you and the bank become partners in the ownership of the house. And if you live in the house, you pay the bank rent. The rent is considered profits, not interest. What happens when you can’t pay the rent? I don’t know. During the current financial crisis, when we saw a lot of US and European banks on the verge of collapse, and in need of massive government bailouts, Islamic banks were weathering the storm rather well. They continued to grow and show profits. But I think this is because they tend to be more conservative and they tend to stay away from things like derivatives and credit swaps. The center of Islamic banking is Malaysia. Most of the local banks in Dubai and the UAE are conventional banks. But most of them have Islamic banking sections. And I think this is mainly a marketing tool. It’s a way to attract investors from Iran and Saudi Arabia who feel good about putting their money in something called an Islamic bond or an Islamic investment instrument.
Passport: Ok, let’s open the floor up for questions, remember *6 to un-mute yourself. Who’s first?
Caller 2: I have one, David, if the floor’s open?
Passport: Go ahead.
Caller 2: It’s Bill Mitchell again. Tom, I’m at the Shorenstein Center this fall and I’m writing a paper on how to sustain the news operations financially and one reason I joined GlobalPost and the Passport was to look at the idea of Membership. And I’m just interested, from your point of view as the correspondent taking part in calls like this, what you think of it? Is this the first you’ve done? Do you see it having potential to improve your journalism? Are you concerned about being influenced in one direction or another? Just whatever you think about the whole process.
Hundley: Well, this is the first one that I’ve done and I’ve been very enthused about contributing to GlobalPost. I see the conventional model that you and I used to work in as foreign correspondents is unsustainable. It just isn’t going to work anymore. I didn’t quite believe it was going to happen to me, but in hindsight I could see it a couple of years out. So we have to find new models. And I think there are real possibilities.
Caller 2: What about the idea of a membership that involves readers, at least conversationally, in the work of a correspondent?
Hundley: Well, I’m fine with that, I think what’s going to happen, what the internet does is create these communities. So whether you call it a community or a membership, or you become a member of a community, we have to find what the market is for what we do, who’s interested in it, and how it can be financially supported. So I’m fine communicating with the members and I think newsgathering organizations have to find ways to identify and seek them out and bring them into the community.
Caller 2: You’re pretty much in the expat capital of the world. Is there opportunity for news operations to create those kinds of communities among English-speaking expats in various places, do you think?
Hundley: Well, there are a lot of online communities. That’s the fascinating thing about the internet; mainly it’s interested in selling homes, finding jobs, best day care centers for kids, that sort of thing. But I think there’s always potential communities of people interested in, say, people in Dubai are particularly interested in Iran because they do business in Iran or the potential for business with Iran, curious about the Iranian money coming into Dubai, certainly in Dubai and elsewhere in the Gulf, there’s a natural community of people interested in oil news, in energy news, and I think the internet can identify those communities, build those communities, and we could design a product that they would be interested in buying. I hate calling news a product, but it seems more and more that it is.
Passport: We have time for one or two more questions; does anybody else have a Dubai-related question?
Caller 1: Yeah, this is David Reedle, it’s actually a question about the expected impact on India. I guess this is a big source of remittances back to India? Have you heard anything locally or has anyone heard anything about the expectations of the impact on India?
Hundley: Yes, you know, when you’re in Dubai, you realize it’s really an Indian country. It’s really an outpost of the Asian sub-continent and it has to have a pretty significant impact. On the other hand, India really has a large and expanding economy. So, yes, the remittances are important, but it’s hard for me judge if this huge amount of money by Indian standards is a drop in the bucket or something that will cause their economy to flutter a little bit. I think in Dubai alone, half a million low-paid workers are from the Indian sub-continent. And then the whole middle class, professional class, teachers, doctors, dentists, are Indian. So yes, it will have an impact.
Passport: Tom, thanks a lot for joining us today and I look forward to continuing to read your excellent coverage of the region.
Hundley: You’re welcome, I enjoyed it.
Passport: Thanks everybody for joining us, we’ll be back in a week.