A Middle East Dream Sours

The worlds tallest building went up,highways looped through the desert,the airport never closed. Dubai expanded into a commerce crossroads for Asia,Europe and America,a place of cigar salons,horse races,a seven-star hotel and suitcases full of money.

And then boom went bust.

The global recession has left Dubai with miles of office space it cant rent and reams of contracts it cant honour. Thousands of foreign engineers,architects,bankers and labourers have been sent home. Like everything else that has epitomised Dubai for the past decade,even its debt is staggering: an estimated $80 billion,with nearly $60 billion of it held by Dubai World,a conglomerate for a number of state-controlled businesses.

News that Dubai wanted to suspend payments on its debt shook worldwide financial markets last week. It is unclear what effects will be felt when trading opens Monday. Stock exchanges in Dubai and across much of the Middle East were closed Sunday during a Muslim holiday.

Dubai is one of the seven emirates that make up the United Arab Emirates,a nation wedged between the Persian Gulf and Saudi Arabia. The UAEs Central Bank has offered emergency support to banks with holdings in Dubai. The neighbouring emirate,Abu Dhabi,which has rich oil reserves,is expected to offer a limited rescue to keep the crisis contained.

I wouldnt expect big damage, said Joe Kawkabani,managing director of Asset Management Algebra Capital in Dubai. The dynamics in Saudi,Qatar,Abu Dhabi are very different than the dynamics in Dubai. They have much richer economies,they have oil and sovereign wealth funds that can support them even during a recession,and they have nowhere near the amount of debt as Dubai.

Apartment and office prices tumbled across the Emirates in 2008. An estimated 400 building and real estate projects valued at $300 billion reportedly have been put on hold. There are fears that debt and weakened investor confidence will hit British banks,including the Royal Bank of Scotland and HSBC,which are large creditors to Dubai and the rest of the UAE.

Collapsing real estate values were not the visions of Dubais ruler,Sheik Mohammed bin Rashid Al Maktoum,whose goal was to build an international city that would echo the grandeur of centuries past,when Baghdad and other capitals symbolised the power of the Islamic world. After Dubai emerged from British control in 1971,its ruling family turned to finance,opening an airport,creating free-trade zones and reaching into regional markets.

Maktoum,a poet and an equestrian,was guiding much of the development before he was named ruler in 2006. To his critics,including some in the Abu Dhabi royal family,Maktoum was brash and reckless,over-developing and leveraging his emirate against the whims of global markets.

Dubai created a lot of envy in its neighbours, said Randa Habib,a Jordanian political analyst. Maybe the development was a bit too risky,a bit too crazy,but everyone would agree that they need the dream of Dubai to continue. It was the first Arab city that proved to the world that it could compare to a Western city with its buildings and its vision. It raised a point of pride.

And it drew a wave of new languages. About 85 per cent of Dubais population of 1.7 million are from other countries,including about 250,000 construction workers,most of them from India and elsewhere in Asia. Human rights organisations have criticised Dubai for the low wages and poor living conditions offered workers,and for turning a blind eye to prostitution networks that served tourists,bricklayers and tycoons.

Loose oversight and light bureaucracy allowed money to flit in and out of banks and investment houses with little scrutiny. Al-Qaida and the Taliban,along with drug smugglers and gunrunners,have laundered money in Dubais financial institutions,according to US investigators. In recent years,international pressure has forced the emirate to tighten regulations.

Dubais calibrated cultural tolerance also is facing pressure from religious conservatives who believed it is jeopardising its soul and traditions. This tension was highlighted in the 2008 trial of an unmarried British couple found guilty of public drinking and indecency for having sex on a beach. The case was as much about cultural boundaries as it was about the dangers of Dubais capitalism.

The debt crisis has sent people scrambling,Kawkabani said.

No one is saying its the end of Dubai … but if this is not handled properly it could be damaging to its reputation with investors and creditors, he said.