On November 26th, while Muslims started the three day Islamic Holiday of Eid Al Adha and Americans were celebrating Thanksgiving, the financial world was focusing on the announcement made a day earlier by Dubai World, the state-owned conglomerate.Dubai World is seeking a six-month standstill in debt payment of liabilities mounting to $59 billion, with the Dubai World property unit Nakheel PJSC facing an immediate delay in the payment of $3.52 billion on December 14th.
The timing of the announcement has been heavily criticised despite the fact that Dubai has now finally concluded that some corporations need to be restructured and has hired Deloitte to help them, sidelining its current management. Instead of being praised for finally admitting the real situation, Dubai is still receiving criticism.
Yes, Dubai might need to restructure its debt of between $60 to $80 billion (huge in the context of the emirate’s $75 billion GDP) but the number pales in comparison to the $2.3 trillion in write downs the IMF estimates US and European lenders will have made between 2007 and 2010, without discussing the trillions of dollars that have been used to bail out financial institutions at the expense of the taxpayers. The claims that the debt restructuring will have a domino effect and cause systemic risk is perhaps overdone since the sums involved are small in the global scheme of things.
The injection of trillions of dollars in financial institutions in the US and Europe have had its detractors, who claimed that those institutions or corporations that do not make financial sense should be allowed to fail.
Unlike the US or Europe, Dubai is setting an example by opening the door to a major reorganisation with the aim of achieving business efficiency. Those critics who claim that Abu Dhabi under the current circumstances should bail out Dubai whether or not the injection of funds will achieve a restructuring of the business plan to ensure its viability, should be reminded that "when it comes to cures, it would be far better to get the job done right than get the job done quickly".
Yes it is going to be painful, but if things are done right it will be a lot less painful than delaying the restructuring process by putting more good money over bad money. No institution should be too big to fail. In terms of what needs to be done, Dubai is helping set an example.In some of the recent articles, a statement was made about reckless spending but one should be aware that all investment decisions that were made during the boom were justified by fundamentals. At the time, Dubai population was growing and there was a real demand for spending and investment. Despite the need, there is no denial that there were speculators, as in every booming market or industry. However, that was not just happening in Dubai.
It was also the case on Wall Street, which praises itself for being so sophisticated and above the fray. Instead of just looking into what went wrong in Dubai, one should educate themselves and conduct proper due diligence and look for fundamentals.
On Friday, one of the most respected investor managers, Mohamed El Erian, from Pimco, expressed his views on CNBC, claiming that "the Dubai fallout is a correction. Not another crisis and that this is a catalyst call that will create opportunities for markets to reprice." One should look for these opportunities. The extent of the effect of Dubai's announcement will be felt in the next few months but we should all ask ourselves how many times historically have countries such as the US or Germany or the UK defaulted before we come to conclusions. If institutions are not being run properly, they should be allowed to fail or at the very least be forced to restructure. If that is the case, the announcement of Dubai should be taken cautiously and as a positive step.
A few days ago, I wrote an article pointing to all the reasons why Dubai will continue to be the hub of the region. Those reasons are still in place. Our modern infrastructure, diversification of the economy, tolerant lifestyle and our efforts to promote education and create a vibrant economy will continue to bear results. We should remember that the father of our country, the great Sheikh Zayed, always gave us an example of unity and fraternity. Today more than ever, United We Stand and support each other’s decisions. Sulaiman Al Fahim is chairman of Arab Union For Real Estate Development (AURD).For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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