The frenzied media coverage dissipated after official statements were issued about Dubai World's (DW) problems. Dubai authorities clarified the situation by stating that DW is a company run on business grounds, though government-owned, and its problems are a market development that have to be dealt with in a business fashion and not as a sovereign issue.
Global reaction to DW saying it needs time to restructure and asking for six more months to repay $3.5 billion in credit was a bit exaggerated. That was partly because Dubai matters to the world more than any other part of the Middle East and partly because of a misunderstanding. The uproar started with rating agencies downgrading what they call government-related entities. Many investors were under the impression that companies ‘related' to governments in the region were privileged and would be supported if they ran into financial difficulty.
Misperception
There is a widespread perception among those doing business in the Gulf that governments cannot afford to allow private businesses to fail — even if they deserve to. Since the collapse of Kuwait's unofficial stock exchange in 1982, when the government bailed everybody out, people have thought that they can get away with taking risks and accumulating unsustainable debts. Unfortunately, some oil-rich countries in the region help to perpetuate this belief, to some degree. So foreigners always factor in what they call ‘sovereign aid' to any deal they get involved in.
The Dubai model has always been different, and it is up to investors and creditors to shoulder the burden of risk-taking, as the model is more free-market oriented. Scrutiny of this model should form part of possible revisions to the global financial system, to which Dubai was more exposed than other economies in the region. The first reactions to DW's announcement indicated that misunderstanding was widespread. The next day, in a note to investors, Royal Bank of Scotland said: "Investors will now have to re-appraise the quality of sovereign support for state-owned entities in the [Gulf] region". The note added: "The other risk is that rating agencies re-assess their views of names in the region ... which in many cases benefit from substantial rating premiums driven by assumptions about sovereign support, which is no longer a given".
After the global economic crisis took hold, Dubai started cracking down on local emerging millionaires who made fortunes from loopholes in the investment environment. Some prominent figures, well-known to regional and international markets, are being sidelined in reshuffles of government bodies and affiliated businesses. These measures were intended to lessen the impact of the global downturn on the emirate's economy, which is heavily reliant on trade and services. You cannot blame a country for following the rules set by the leading economies in addressing weaknesses. Most of Dubai's development was financed through the global market, and it therefore abides by international rules.
Wild exaggeration
As for the media, their reaction is in keeping with the way many — some regionally and more globally — have reported about Dubai. It is not just initial envy and now rejoicing at signs of weakness, but wild exaggeration. Western reporters and commentators who were hailing Dubai as a bright spot in the middle of the region have turned to the other extreme, denouncing its economic model. Those who had enjoyed Dubai's luxury and opportunities were among the voices amplifying the problem. Only reasonable and moderate voices, a bit critical during the boom days, wrote and commented in a rational way, explaining the issue in its business context and downplaying the far-fetched analysis about the emirate and its development.
In conclusion, Dubai was affected by the global downturn more than other economies in the region due to its success in integrating with the rest of the world. A correction has been underway since the start of the financial crisis more than a year ago and what is happening now is part of that process. Concerns among international financial institutions that Dubai's corrections might expose some of their own problems they would prefer to keep hidden should not cause them to lash out. This process might help them to come clean and balance their manipulated books.
Dr Ahmad Mustafa is a London-based Arab writer.
