By Damian Reilly
James Wolfensohn hails non-oil strategy but says speed of expansion contributed to debt problems.
Dubai’s recent financial woes were the result of over-leveraging, reliance on continuous economic growth and too rapid a rate of development, former World Bank President James Wolfensohn said on Sunday.
Speaking on the sidelines of the Global Competitiveness Forum in Riyadh, Wolfensohn said: “I think the leadership in Dubai had all the right objectives in terms of building an economically competitive environment without the benefit of hydrocarbons.
"Therefore the Sheikh decided that he would focus on the service industries, on education, on the creation of space in which you could live comfortably and the provision of services. And I think that was a pretty good strategy.
“What is now evident is that it was probably implemented too quickly, without the space to absorb it. And because of the leverage that was necessary to get it done quickly, it was dependent on continuous economic growth, so when growth stopped, the leverage hit and it ran into troubles."
Dubai World, one of Dubai’s three main state-owned business groups, said on November 25 that it would seek to delay repaying debt for at least six months, roiling markets in the Middle East and around the world.
Wolfensohn added: "It doesn’t mean I think that the overall strategy was bad, but I do think the timing and the risk of extra leverage, as has so often happened in the past, came back to haunt him. And he has to go through that now with all the reorganisation.”
Wolfensohn added that as a result of the leveraging it had secured, the global economic crisis hit particularly hard in Dubai.
“I think directionally it (Dubai’s development) was great, I think in terms of implementation it was too quick and got too leveraged and was too dependent on continuous economic growth and when that stopped the effect of leverage is the counter.
"It means you fall back more quickly than you grow, and that is what has hit Dubai.”
Dubai may have total debt of as much as $170bn, more than previously estimated, investment bank EFG-Hermes Holding said in a report Jan 19.
It's always good to state the obvious, 18 months after the event. USD 170 bn though? The estimates just keep on rising...