The Dubai bubble

By Thomas Lifson

World financial markets are quaking in the wake of a request by Dubai World, a principal investment vehicle for the Emirate of Dubai, to suspend debt service amounting to billions of dollars in the next 6 months. The company owes a total of $59 billion. Islam, of course, opposes interest payments on borrowed money, so much of the debt is so-called Islamic debt, in which different labels are applied, but the concept of paying for the use of money remains. Dubai's fabulous skyline has been built on a vast pool of debt, and property there was often pre-sold and re-sold in the classic bubble profile.

What has many worried is that Dubai's financial disclosure laws lack transparency. Many observers assumed that oil-rich Abu Dhabi (Dubai has no oil itself) would automatically bail out its fellow UAE member Dubai, but that assumption is being questioned. In recent years, as Dubai, long a free port with one of the most open-cultures found in the Arab world, has prospered and grabbed world attention; Abu Dhabi may have chafed a little at the glory coming Dubai's way.

The two emirates sport rival global airlines: Emirates, based at Dubai Airport and Etihad, based at nearby Abu Dhabi. Emirates is bigger, more widely advertised and publicized, and holds the record book for ordering the most modern long range aircraft, including a huge fleet of A380 super jumbos. Emirates reported a substantial profit in the last quarter, something that has many others in the airline business scratching their heads. Critics have long charged that Emirates enjoys hidden subsidies, something the airline adamantly denies.

A devastating real estate bust in Dubai is at the root of much of the current financial crisis, but the suspension of debt service calls into question the optimistic growth forecasts underlying Emirates Airlines' aggressive equipment orders. Nearly all airliners are purchased with concessionary financial terms underwritten by governments. So Emirates is unlikely to face any lending pressure for aircraft anytime soon. Borrowing for other purposes may become more difficult, however, especially if Dubai's tourist boom fades in the wake of property troubles.

Alexander Smith of Reuters suggests that Emirates may be forced into a merger with smaller (but still formidably large) Ethihad. A third airline, Qatar Airways, also runs an intercontinental hub in the UAE. One must wonder how many competing hubs will remain when all the debt is untangled. The three Emirati airlines together account for a substantial portion of the next generation aircraft orders (A380, B787, A350). If they all have trouble, so does the airliner manufacturing industry, already full of trouble.