Monday, November 30, 2009

Is Dubai Too Big to Fail?

Is Dubai too big to fail?...

I liked Daniel Gross's Lehman analogy, only I find it a bit off, by a few orders of magnitude. Dubai is not Lehman Brothers, Nakheel is Lehman Brothers (And only metaphorically... Nakheel's debts amount to a high single digit percentage of what Lehman's were at the time of their collapse).

Yes, Dubai World and Nakheel are large companies, but in comparison to the size, not just of Dubai's economy, but of the large merchant families in Dubai (Futtaim, Galadari, Gargash, etc), they'd be like a sub-section of a department of a division were Dubai seen as a single corporate entity.

Yes, Dubai has seemed a bit flashy in recent years, but deceptively so, the way a sumo wrestler seems fat. There actually is a lot of substance underneath. As someone on the ground out here, I can tell you that the malls are jam packed (even the brand new mega malls), the roads are still clogged, the new metro is seeing increasing ridership every month, and major Dubai corporations like Dubal (7th largest aluminum producer in the world), Ducab (largest cable manufacturer in the middle east), DP World (Which, while a subsidiary of Dubai World, was excluded from DW's debt restructuring), and Emirates Airlines are all making money hand over fist.

The National's Wayne Arnold notes a few things the international media seems to have missed in their rubbernecking rush:

Dubai has never defaulted on or missed a debt (loan or bond) payment

Dubai is not a sovereign entity

Nakheel is a private company. (Nakheel's sukuk was never backed by the Dubai government and never even had a credit rating)

Dubai's traditional economic backbone has, and always will be trade facilitating infrastructure. This includes the Dubai Creek dredging, the Jebel Ali port development, the airport expansions, and now the Dubai Metro.

The money is there, but there are politics involved. Abu Dhabi's SWF alone has aver a trillion US$ in assets. The whole of Dubai's debts are a rounding error in the Abu Dhabi portfolio. The issue with Dubai World and Nakheel is not a lack of funds, on the part of either the Dubai government or the Abu Dhabi government. The issue is... something else.

Update: Ezra Klein gives a hat tip to an elightening graph that kind of garrotes the Dubai-Lehman analogy.

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