Tuesday, November 10, 2009

Dubai's Shut Up Finance

We have heard of project finance, debt finance, LBO finance, islamic finance... we have even heard talk of Green Finance (self serving smile). But until yesterday, we never had the pleasure of Shut Up Finance.

As with indoor skiing when outside temperatures reach 120 degrees Fahrenheit (50 C), seven star hotels and artificial islands shaped like palms and world maps (see below), the dubious distinction for most uncouth bond salesmanship belongs to none other than Dubai.

Hubris As Seen From Space

The emirate's ruler just said the second half of its $20 billion bond program will be “well received,” and that those who doubt the unity of Dubai and Abu Dhabi (the United Arab Emirates' petro-wealthiest member) should “shut up”. The "unity" in question is, of course, all important since the first $10 billion was bought entirely by the U.A.E.'s central bank and has been used in part to bail out the developers of said artificial islands and other such hubristic extravaganzas.

The bailout money is sorely needed because Dubai is... well... broke. Since it has no hydrocarbons to call its own, the tiny nation first rose to prominence as the playground of other, notionally abstemious, Arabs residing next door. It then went on to blow its own bubble on a sea of easy credit, margin and rollickingly speculative share and real estate markets.

To grasp the magnitude of hubris at the Gulf bubbledom all we need do is compare "before" and "after" pictures from downtown Dubai.

Dubai In 1990

The Same Place, Last Year

I'm going to shut up now.


  1. The most disturbing aspect of the Dubai bubble reveals itself when you find out who built the castles in sand. The imported labour and the living conditions they were subjected to, and the contrast with the surrounding wealth was a real eye opener. A haven't been so shocked by such a contrast in living standards since I saw the TV reports of the aftermath of Katrina.

    Hell : Would be really interested in your take on the thoughts of the gentleman in my Avatar, Henry George?


  2. Your (free) comment is brought to you today courtesy of Percy Bysshe Shelley, 1791-1822, English poet :


    I met a traveller from an antique land,
    Who said ---"Two vast and trunkless legs of stone
    Stand in the desert... Near them, on the sand,
    Half sunk a shattered visage lies, whose frown,
    And wrinkled lip, and sneer of cold command,
    Tell that its sculptor well those passions read
    Which yet survive, stamped on these lifeless things,
    The hand that mocked them, and the heart that fed;
    And on the pedestal, these words appear :
    My name is Ozymandias, King of Kings
    Look on my Works, ye Mighty, and despair !
    Nothing beside remains. Round the decay
    Of that colossal Wreck, boundless and bare
    The lone and level sands stretch far away."

    No further comment necessary, and I would not presume to add anything to what Shelley has already expressed so... exquisitely.

  3. Re: Henry George,

    Interesting fellow; had never heard of him until now. His major stress on land taxation was sensible given 19th century technology and economic structure (eg agriculture). But I think we are well past this now and would concentrate more on things like energy.

    Still, I am intrigued by the underlying general concept of taxing common goods.


  4. Moin from Germany,

    This picture
    sums Dubai up... ;-) ( also build from an state owned construction company in dire need of a bailout...)

    Thank god there are only a "few" skyscrapers under construction....

    Under construction / Wikipedia
    Burj Dubai · Pentominium · Burj Al Alam · DAMAC Heights · Princess Tower · Marina 101 · 23 Marina · Emirates Park Towers Hotel & Spa · Elite Residence · Lam Tara Towers · D1 · The Marina Torch · Infinity Tower · Al Yaquob Tower · The Index · HHHR Tower · Ocean Heights · Ahmed Abdul Rahim Al Attar Tower · Central Park Towers · I&M Tower · Dubai Pearl · Sulafa Tower · G-Tower · Mag 218 Tower · Acico Twin Towers · Marina Pinnacle · Khalid Al Attar Tower 2 · Vision Tower · Ubora Commercial Tower · Conrad Dubai · Metro Tower · Al Tayer Tower · Churchill Towers · Sama Tower · The Buildings by Daman · Rolex Tower · Anantara Towers · Tiara United Towers · Al Bateen Tower · Trident Grand Residence · Latifa Tower · Executive Towers · Grosvenor House The Residence · Concorde Tower · Platinum Tower · Dubai Jewel Tower · Jumeirah Bay · Sidra Tower · Dubai Tower · Tiffany Towers · Silver Star · The Bay Gate · Dubai Islamic Bank Tower · Jumeirah Al Khor Residence · Pier 8 · Iris Bay · Liberty House · Goldcrest Executive · Dubai Gate 1 · The Prism · AG Tower · AU Tower · Lake Point Tower · Swiss Tower · Goldcrest Views 2 · The Residences · Silverene · Dubai Arch Tower · Laguna Tower · Verde Residences and Offices

  5. When is Babel slated to begin construction?

  6. This is a golden opportunity, the American taxpayer should bail them out, just make sure we get better terms than we did with our banks, and contingent on a cease and desist order for more floating palm-shaped resorts--like we should have done with our banks.

  7. This comment has been removed by the author.

  8. RE: Henry George - some of our local Libertarians (in PGH PA) are big-time Georgists.

    I can't claim to know all that much, but here are some interesting points:

    Property taxes that tax the building are counter-productive. Since improvements raise tax burdens, leading to minimal upkeep which begets slumlords. So, tax the land since the bldgs are really fungible anyway - once water gets in and mold takes hold you have to gut it anyway.

    Increasing land value* taxes should reduce land hoarding / slumlording by increasing holding costs - it's not economical to buy up tracts of land and let them sit hoping a big box store will give you a million (Rt. 51 in PGH is exactly like this 90% owned for my whole life, only a dozen stores on a 2 mile stretch).

    *Land value is calculated by usefulness ie: potential use of land or proximity to jobs, so the parking lot in town where there could be a skyscraper costs a lot, exurbs cost least - working farms would have to get an exemption due to size.

    One of the more esoteric parts of the LVT justification is that since you didn't *make* the land you're really compensating the public at large for your exclusive use of it via land value taxes. This, coupled with a tax "prebate" of say, $10K/year could substitute for welfare, since if your land taxes were less ie: a poor renter or working class you either could keep the prebate or it would offset your taxes while the wealthy would pay more, and everyone keeps all of their income.

    This scheme could well help out with the "sustainability" issue, since inner city brownfields should be recycled faster due to holding costs, which should reduce the need to plow more greenfields for new development.

    Heck, just reducing the incentive to slumlord and land hoard makes it worth looking at IMO.

    Hope this helps!
    PGH PA

  9. "All that sunshine and not a solar panel in sight. Fuck 'em!"

    Thanks for the smile, Edwardo ;)

    Maybe Dubai will become the future Petra. Tourists wandering around saying "Its cool, but WTF is it doing out here?".

  10. No need to be too critical Hell, I think the Dubai Ruler said this in part jest when he addressed his audience who responded quite spontaneously with laughter incidentally, although it does sound a little stern when we read it on the papers the next day. Dubai's ambition is of course to transform the UAE into another gateway city like New York, London, Singapore and Hong Kong and they wished to get there fast, not mainly because they are running out of oil in 10 years' time - oil was never the major contributor of their GDP anyway, but the need to always stay in front of the curve or ahead of the chasing pack -- a pack which includes countries like Qatar, Bahrain, Kuwait and KSA. This ambition was given a rude awakening when the crisis hit them last year wherein undeniably the Americans were the main culprits as highlighted in your blog. On solar panels, they do have green building regulations like the USGBC LEED program which are part-mandatory and part-voluntary in the construction industry. They have also built (and are building) many district cooling plants, natural gas networks, sewage treatment plants, co-generation plants as well as solar fields, zero carbon city & a nuclear plant in Abu Dhabi. Basically, I think they are supporters of a sustainable lifestyle and have organized many seminars and conferences to educate and encourage her people. On castle in the sand, they are definitely not the first – just look at Vegas but apparently, Dubai is now an easy target for a whipping boy. So the more crucial question lies, how else could they make themselves useful to the world; sustain her economic growth and to get a piece of the world economic pie as the New World Order unfolds? Or should they simply remain a desert without any ambitions?

  11. TJ, when I look at Dubai, I think of Vegas... and Phoenix, too while we're at it.
    Um.... where is the water coming from ?
    Where WILL the water come from when the oil culture bottoms out ?
    Dubai's construction, like... Phoenix's and Vegas's is just not... compatible with the desert, I fear.

  12. Debra,

    I'm afraid your fear is unfounded -- their model is pretty sustainable and could be further enhanced with improved technology and time. Dubai's water supply is a by-product (steam) of their power generation. And natural gas (from Qatar) is the source of fuel for the power turbines. For 6 kW/person of electricity generated, they produce about 1,800 litres of water per day. By this method, they in fact produced more water than is actually needed per person based on a guide of 500 litres per person (per day). By the time the oil culture bottoms out in the Middle East (which by the way is never), the nuclear plant and plasma gasification plants would already be up and running.

  13. DaveP : (PGH PA, Pittsburgh Pennsylvania?) Georgist ideas have had many disparate bedfellows over the years, from Winston Churchill to Green Parties here in Europe. Replacing tax on income to tax on Land/Resources would (I believe) produce radical change. Here in the UK over 1 million new landlords have been created over the past ten years, over 10% of the population. The idea of a Land Value Tax stands little chance of garnering popular support in the voting boomer generation/landlord class. Meanwhile the head of the Bank of England today was talking of recovery, on the same day we found out 20% of under 25's were out of work.

  14. "how else could they make themselves useful to the world; sustain her economic growth and to get a piece of the world economic pie as the New World Order unfolds? Or should they simply remain a desert without any ambitions?"

    Fair enough. They're just as entitled as the rest of us to delusions of sustainable lifestyle. Its just that the extreme environment and rapid growth spurt seem to make the unsustainability all the more glaringly obvious.

    Perhaps their lack of natural resources will drive the necessity that becomes the "mother of invention". They could invent some fantastic new technology that ironically still gives the Middle East control over the world's energy supply....

  15. By the time the oil culture bottoms out in the Middle East (which by the way is never)

    True, If you do not plan to live beyond 2020!

    In my opinion, the panic about the non-existing - or rather: Normal climate change is caused by an urgent need to rapidly abandon Oil. While not actually saying THAT.

    Admitting that Oil extraction speed is hitting limits dictated by physics ... that would piss off the Saudis, cause the US to default and brick the BRIC's.

    Resource-limited growth will destroy all those countries with 5% p/a population growth that *somehow* hopes to grow their economy enough to feed their future population.

    I eat healthily and exercise in the expectation of seeing this globalized "find the bigger sucker"-economy blow up - not many generations get to see the fall of Rome.

  16. Its just that the extreme environment and rapid growth spurt seem to make the unsustainability all the more glaringly obvious.

    It does - they build so quickly that waste disposal could not keep up.

    Untreated sewage is dumped straight into the sea. If you go swimming from your private island and the sea snakes do not get you, then some pox will!

  17. It's a glorious, sunny day here in Dubai. I went to beach 10 minutes from my office tower for lunch. The comment about raw sewage is outdated, as I swim in the sea all the time. The water and air temperature is perfect this time of year.

    I work here in Dubai in a world class environment. My office has expats and locals mixed together, working as a team to build something that will be a global game changer. There's a buzz here.

    Dubai isn't perfect, but over 80 percent of expats would choose to stay here even if they lost their jobs. That says something is special here that the whole population - locals and expats - want to maintain and improve.

    H.H. Sheikh Mohammad may have said, "Shut up", but he was expressing his frustration that no matter what wonders Dubai performs, it is still subject to unfair criticism. The comments on this blog sadly substantiate that.

    Dubai has excellent civic infrastructure, great roads, almost no crime, terrific family lifestyle, wonderful scenery, every kind of food, growing tourism, healthcare, media and finance sectors, and an ethos of tolerance and respect for all people here.

    There are worse places to live.

  18. "If you go swimming from your private island and the sea snakes do not get you, then some pox will!"


    "working as a team to build something that will be a global game changer"

    Such teasing is cruel. Give us some hints.

    "an ethos of tolerance and respect for all people here"

    It does give that appearance, but its hard to believe that the hard-line neighbors are pleased about it....

  19. There are worse places to live.

    Certainly - The main problem I have with believing that Dubai is sustainable is that the whole place is designed to conspicuously show off wealth and entirely financed by consumption of said wealth. Its like the garish bling that a rapper would wear.

    When one goes through Duisburg or Antwerpen there are vast chemical factories for miles and miles where simple crude oil gains in value by athousand times or more - depending on what the output is.

    None of the Oil-producing Arab countries have anything like an advanced chemical production despite sitting on top of the resources, having lots of empty space to build on and restless youth that need productive work.

    They are apparently happy to give away 90% of the value of their only resource and blow the money on imported luxury items.

    I would LIKE the Emirates to be different from the rest - but it is difficult to imagine that they can be.

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  22. Oh, goody, I get to comment here on something I don't often get to say on this blog.
    Actually.... I have noticed that our repressed Christian heritage (which many of us have no idea of...) comes to the fore in comments about some obscure revenge that is going to befall any who indulge in conspicuous consumption.
    Actually... the author of Ecclesiastes notes a long time ago that in THIS world the conspicuous rich and evil do not always get their (just) deserts. That idea is just our wishful thinking...

  23. Great to see the changes in Dubai infrastructure.....

  24. Not only Dubai all over the World has Crisis i think its normal but i am sure it will be soon much more better then before please dont make panic !!!

  25. yes i will agree that it will be soon better so never think negative...
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