Dubai built a city of skyscrapers and artificial archipelagos on the promise of globalization, creating itself as a vital hub for the free movement of trade, people and money worldwide — all things that have been disrupted by the coronavirus pandemic.
Now, with events canceled, flights grounded and investment halted, this sheikhdom in the United Arab Emirates is threatened both by the virus and a growing economic crisis. Under pressure even before the outbreak, Dubai and its vast web of state-linked industries face billions of dollars in looming debt repayments.
And though it was bailed out a decade earlier, Dubai may not be able to count on another cash infusion, given the crash in global oil prices.
“They facilitate the transport and the buying of things and the movement of people,” said Karen E. Young, a scholar at the American Enterprise Institute who studies Gulf Arab economies. “That’s not the world we’re living in right now.”
Dubai’s dedication to global trade is memorialized in the first sentence of the first article of its 50-Year Charter, something created last year by its ruler, Sheikh Mohammed bin Rashid Al Maktoum, who has overseen much of the city’s growth.
“Dubai is destined to be a crossroad between East and West, and between North and South,” the charter says.
Prior to the pandemic, it reached that status. Dubai International Airport for years has been the world’s busiest for international travel. Its vast Jebel Ali Port ranks high globally for its cargo operations.
That economic diversity stems from the classic retelling of Dubai’s story. After discovering oil reserves, but none nowhere as large as those in neighboring Abu Dhabi, then-ruler Sheikh Rashid bin Saeed Al Maktoum warned it would be a finite resource to the city-state.
To protect against that, Dubai became a company town. The state-owned long-haul carrier Emirates flies in foreign workers and tourists alike, who buy alcohol from state-owned duty-free shops, live in housing largely built by state-linked developers and hold credit cards from state-backed banks.
The wider nexus webs out into something U.S. diplomats have called “Dubai Inc.” Much of it worked, up until the pandemic.
“The aggregate of all those crises we faced in the past doesn’t equal this one,” said Tim Clark, president of Emirates airline, on an April 29 conference call.
For Emirates, it must wait until countries open up before filling its flights. Even then, how will airlines handle it when a sneeze “goes 25 feet down the cabin” or if governments enforce social distancing and require empty seats, Clark asked.
“The airline industry cannot afford to have large numbers of its seats idle,” he said. “It would be absolute economic catastrophe, worse than the current situation.”
Then there were the problems Dubai faced before the crisis. The value of Dubai’s real-estate market had already dropped 30% since 2014, when it announced it would host the Expo 2020 world’s fair. That event, on which Dubai already has spent billions, has been postponed to 2021.
U.S. tariffs on aluminum tore away 10.5% of Dubai’s exports of the metal to America. President Donald Trump’s trade war with China threatened Dubai’s shipping, as the government says some 60% of China’s exports pass through the city’s free zones to Africa and Europe.
The pandemic has simply thrown into relief how much Dubai, like the rest of the UAE, relies on global trade. Asked about the pandemic’s effect during a teleconference for the Beirut Institute, Anwar Gargash, the Emirati minister of state for foreign affairs, acknowledged: “There will be questions about globalization.”
Meanwhile, Dubai faces looming debt payments that stem from its 2009 financial crisis. By the end of this year alone, Dubai and its government-linked firms face $9.2 billion of debt coming due, with a massive $30.6 billion bill coming by 2023, according to London-based Capital Economics.
“Worryingly, given its own large debts, Dubai’s government is not in a strong position to provide support” to indebted firms, wrote James Swanston, an economist at Capital Economics.
The government’s Dubai Media Office did not respond to questions from The Associated Press over the upcoming debt obligations. However, officials like former Dubai finance director Nasser al-Shaikh have sought to describe the city-state’s sovereign debt as separate from those of state-linked firms, a distinction authorities also sought to make in the 2009 crisis.
But in 2009, Abu Dhabi ultimately needed to step in with a $10 billion bailout and the Central Bank offered another $10 billion as creditors panicked over such state-linked firms failing. Dubai at this time also changed the name of the under-construction world’s tallest building from Burj Dubai to Burj Khalifa, after Abu Dhabi ruler and UAE President Khalifa bin Zayed Al Nahyan.
Abu Dhabi has the reserves to easily bail out Dubai again, but may worry about encouraging reckless investments. Oil prices, the bedrock of Abu Dhabi’s economy, also have dropped dramatically in the pandemic. The cost now of credit default swaps on Dubai’s debt — a form of insurance that promises investors payouts in case of a default — already have spiked by 200% from late February, according to data firm Refinitiv.
But Dubai has faced global economic crises before, perhaps the most serious coming in the grips of the Great Depression in the 1930s. Pearls had been the region’s most-important export for some 70 years, but the financial crisis and artificial replicas crashed the prices of the one commodity local freedivers risked their lives to claw out of clams.
Seeing an opportunity in its location, Dubai soon began re-exporting tax-free gold into India — or profiting from the precious metal being smuggled, as Indian officials described it for decades. That re-exporting business lives on in the economic free zones across Dubai today.
“I do think they they will pivot again,” Young said. “They will find a new way.”