Dubai risks taking on too much debt

17 October 2008

The scale of the emirate’s debt is becoming a concern as major markets are flirting with recession.

The scale of the risk Dubai’s rulers have taken on is becoming more apparent by the day.

The emirate’s liabilities now outstrip its gross domestic product, according to a report released on 13 October by ratings agency Moody’s Investors Service, and the megaprojects that have come to define the city state are not expected to generate significant revenues for at least five years.

Dubai shows no sign of being persuaded to change its strategy. Indeed, it is pressing ahead with ever more expensive projects all the time.

The cost overruns for the metro network are now reaching into the billions of dollars, for example, and if it does decide to put one of the lines underground, as has been suggested, the figures are sure to balloon even more.

Up until now, the emirate has felt little reason to be concerned about such matters - international businesses have continued to expand into the Gulf, and Dubai has been better than most at persuading them to base themselves in its skyscrapers.

Tourists have also been arriving in ever larger numbers to fill the thousands of new hotel rooms.

But the scale of its debt has become an increasing concern now that major markets in other regions are flirting with recession and more business travellers and tourists are opting to stay at home.

So far this year, the spreads on credit default swaps on some large Dubai companies have increased markedly - a sign that financial markets believe there is now a far greater chance of a default.

No major project is likely to collapse and Dubai would, in extreme cases, be able to turn to Abu Dhabi for financial assistence.

But if future revenues fail to materialise as expected, Dubai will find it has to rely far more on its richer neighbour for support than it would like.

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