Is Dubai about to default on its £50bn debt? | Business | The First Post.
Dubai could become an economic basket case on the level of the Icelandic disaster as the cost of insuring its astonishing sovereign debt skyrockets on investor fears the city-state may default on its debts.
Yesterday, to the considerable surprise of the financial world, Dubai announced it would restructure its largest corporate entity, Dubai World, a conglomerate spanning real-estate and ports, and announced a six-month standstill on the company's debt repayments.
In all but name this is the Dubai government reneging on its debt.
And this place was going to be the next world financial centre? The place where all those Brits who were going to flee our supposedly oppressive tax system where going to set up shop?
Like Iceland, Cayman, Jersey, Guernsey, the Isle of Man, Ireland, Bermuda, the Turks & Caicos (the list goes on, and on) this is a secrecy jurisdiction whose own finances are collapsing. The business model of these places has failed.
You can't build an economy on the basis of tax incentives.
You can't win by beggaring your neighbour.
People - even in secrecy jurisdictions - need services. So tax has to be paid.
When will we realise - tax is a good thing that pays for what we all need in the world. It is, in fact, the bedrock of our prosperity.
Dubai's failure will be a crisis for some - and will have human cost. But that's inevitable until we rid ourselves of the pernicious consequences of neo-liberal economics. The sooner the better. And the smaller the human cost will be.
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Richard
Whilst it would of course be very worrying if Dubai defaulted, in reality its not going to happen. Dubai is one of the emirates making up the UAE, and ultra oil-rich Abu Dhabi will not let Dubai go under. Anybody who understands the Arab culture will realise that defaulting on debt is a totally different issue in that part of the world than it is in the West. Its a completely dishonourable thing to do under Islam.
But there’s a “game” going on here. Abu Dhabi will bail out Dubai on the right terms. Those “right terms” seem to be Abu Dhabi getting a controlling equity stake in Emirates Airlines and other extremely valuable corporate jewels, including Dubai World. Dubai was never going to agree to that until it had to. That time has probably now arrived.
I think you are severely over-stating Dubai’s role as an “offshore” finance centre. Financial services make up only a modest proportion of Dubai’s economy. Yes, its making a concerted effort to grow that business (and will benefit enormously from the EU driving private wealth capital further afield), but as a percentage of its GDP its very modest indeed.
I’m also not sure that Dubai was ever anticipating huge numbers of Brits to move there as tax exiles. Some certainly, but not many. Wealthy Brits are more interested in holiday homes there. The main immigration will be from India and Russia, and I’m told that around 35,000 white South Africans have moved there, driven out by the new positive employment discrimination policies back home. But for me Dubai’s business model has always been flawed. They’ve effectively built two incredibly expensive districts (Burj Dubai and the Waterfront area) which were each aiming to house around 650,000 new immigrants. Its just impossible to see 1.3m new immigrants settling in Dubai. Totally unrealistic, and that’s where Dubai has got it so badly wrong.
Its ironic though that Dubai has sought to develop financial services (along with tourism) because its own tiny oil reserves are now virtually non-existent (Abu Dhabi has all the UAE’s oil), whereas the long-established offshore finance centres are looking to develop new industries to become less reliant on financial services !
But you miss one key point. Of course Dubai needs taxes (or at least government revenues which might be oil revenues) to provide services. But Dubai has always managed to provide its domestic services out of other forms of taxes (import duties, consumption taxes etc) rather than other personal or corporate taxes. That model isn’t where its got things wrong. Where its gone wrong is in borrowing billions to build an infrastructure on a flawed model. The global economic problems clearly haven’t helped one iota, but personally I doubt if the Dubai model would have worked in any event. The dream was far too big and grandiose. By contrast, Abu Dhabi next door is building US$350 billion of new projects which will make Dubai’s look very average. The huge difference is that Abu Dhabi is not needing to borrow money to finance it as the reserves are already banked in its coffers from oil revenues. Thet also have something like 250 years of proven oil reserves left at current levels of supply. Abu Dhabi certainly does not need to impose taxes on its residents.
Dubai has fallen into the same trap as Northern Rock et al – short money to fund (and secured by) long assets. Whoops, the assets aren’t worth what they were, and the house falls down.
Everyone should study history, recent and ancient – all the answers are there.
The young female sage of Jersey
When are these states going to realise that ‘successful’ investment in this kind of infrastructure feeds directly into land values and that an annual land value tax could therefore make the investment self-funding?
@Rupert
Nice comment and close to the mark.
What has happened in Dubai is the market working its magic. The emirate over-spent/over-borrowed/over-built and now the market is taking them down to size, the beauty of creative destruction. The difference being the heavy state involvement and structure of the UAE.
In Dubai’s case they can either throw themselves on the mercy of the financial markets from which they have borrowed or on the mercy of Abu Dhabi, either way they will be paying for their profligacy. Actions, consequences, responsibility, all those good things.
As a frequent habitu?© of Dubai I can say that I am not happy for the foreign workers no longer having as much work as they once did (allowing them to pull themselves out of the poverty of their home countries) but I am glad for myself and others who can score/scoop great deals on real estate and other goodies now that the bubble has popped/deflated.
I (heart) free markets!
Georges
I love this comment!
“As a frequent habitu?© of Dubai I can say that I am not happy for the foreign workers no longer having as much work as they once did (allowing them to pull themselves out of the poverty of their home countries) but I am glad for myself and others who can score/scoop great deals on real estate and other goodies now that the bubble has popped/deflated.”
But you were happy for them to be treated like slaves, I take it?
@Arnald
The labour situation in Dubai (and throughout the Gulf) is quite the issue. This is a matter I have spoken out on forcefully in the countries of the Gulf, no doubt you have done the same…
What to do about the situation? There are many facets. The treatment of many workers is shameful to say the least. The workers themselves know what the problems are before they get to Dubai (an observation not a justification) and know what is in store upon arrival. Free markets demand free men. So, what to do? Campaign for better treatment of foreign workers no doubt. I would not stop the ability of foreign workers to go and work in Dubai. Unlike many on these pages I am not going to condemn these men and women to a life of penury as a subsistence farmer or rag-picker in their home country. ‘Social justice’ is a nice comfortable slogan when uttered from the cosy confines of a western European country, quite different when one is trying to escape a Bangladesh hell-hole.
We should celebrate the opportunity Dubai affords these individuals attempting to escape real poverty and work to ensure they are treated much better. By ‘ensure’ I mean actually making it happen and ending the poor practices, not using it as a never-ending funding dodge in order to keep some useless London-based non-profit or civil-society twits in business. You know the types: reports written, posturing, meetings held, nothingness….
Georges
They don’t need to raise taxes. In the long term they have enough cash from their residual oil assets to continue paying $650k to every UAE national couple that marries, but at the present they are caught in a liquidity squeeze.
Arnald
I haven’t the foggiest what you are talking about. Your postings make no sense whatsoever. Please elaborate.
I know several Channel Islands businesses who market extensively in the Niddle East and I can assure you (a) that they aren’t looking for Russian-connected business and wouldn’t touch it with a bargepole, and (b) very few Russians would dare look at the Channel Ialands as the level of secrecy is nowhere near enough for most Russians. That’s the very reason why they opt for Dubai, Switzerland and Singapore and long may that continue.
As far as I am aware, most Channel Islands firms marketing in the Gulf are aiming at oil-rich Arab families with diversified global investments requiring to be structured for tax and estate planning purposes in the country of investments, especially real estate, and the business of wealthy non-resident Indians who operate very successful Gulf trading businesses and who wish to plan for the succession of their family wealth and their family businesses. I’m not sure why you or anybody else would have any problem with that. No taxes being avoided in the Gulf or in India and full compliance with the tax laws governing foreign investment in real estate in the UK, Germany, Turkey, Morocco, the US etc. What possible problem would you have with that?
My integrity is absolutely fine by the way. You really have no idea and I don’t believe you should be allowed to make comments like that on this site where a Code of Conduct supposedly exists.
Johann Hari wrote a great article in The Independent some months ago about Dubai, and how the party was well and truly over. Dubai sums up everything that’s wrong with the neoliberal model of capitalism. A ludicrous and utterly unsustainable property boom based on buckets of cheap credit, hype and greed, a workforce of get rich quick ex-pats and, keeping it all going, vast numbers of exploited labourers from poorer countries.
And now, surprise, surprise, it’s all coming undone. Still, maybe we in the UK shouldn’t get too censorious. Given the greed, incompetence and arrogance of the bankers, and the total failure of our politicians to bring them to heel, let alone punish them, I’d say the moral and intellectual bankruptcy shown in Dubai is also present in spades over here.
Hmm so they don’t avoid any taxes? Why use an offshore specialist firm then? Why not just pay $200 for a tax return. Pull the other one..
@sickoftaxdodgers
We exported the intellectual bakruptcy to them!
Alex
They use international advisors to properly structure their foreign investments into the countries where the property is based. Its called legitimate tax planning, designed to avoid unnecessary tax leakage. All these countries have very specific legislation dealing with foreign investors in their property. They are happy with the tax implications of the structures used. Believe it or not, many countries actually WANT foreign investors to invest there.
In your earlier post you seem to be mixing up Dubai and Abu Dhabi. Both are states within the United Arab Emirates, which is a federation. Abu Dhabi is the one with the oil, not Dubai. Dubai has no reserves (indeed it has much less than nil reserves now !).
@Rupert
Your tax leakage is someone else’s life saving operation
Arnald
Actually Arnald my comoliance department has no problem at all with my “dalliances”, not that its any of your business. You see, compliance departments deal with proposed new business which is presented for approval, which is always high quality and fully-compliant business, rather than on the mere theory that it might be possible to bring in business from a jurisdiction which might not meet those high standards.
You seem to deal far too much in theory of what’s possible than in reality. Some people and organisations, believe it or not, operate to very high standards and refuse to compromise their high standards. In every jurisdiction of the world it would be possible to find dodgy immoral business, marginal business and blue chip fully-compliant business. For those who are only looking for and will only take on the latter, its not an issue. Such business is not tainted by the other categories of business, which become irrelevant if its neither sought nor accepted as a very strict policy.
In your mind, every piece of business from the Middle East, China, Russia etc must be criminal or dodgy. Maybe the majority of it is, but that still leaves a huge amount that isn’t. There is more than enough high quality business to go for. And to help put it into perspective, the dodgy stuff wouldn’t dream of coming to this part of the world in this day and age. Singapore, Switzerland, Hong Kong, Dubai (Russians putting their money there) and Panama amongst others have that market sewn up, thank goodness.
You can assume all you like, but your assumptions are way off beam.
Arnald
By the way, I always think of any potential knock-on consequences before I press the “submit comment” button. Do you ?
Rupert
I have asked Richard Murphy to delete two previous posts in response to your threatening second post about ‘consequences’.
Please explain what consequences.
Compliance, it would seem, means different things to you and me.
Do you not believe that it should encompass reviewing existing relationships?
Arnald
I think I have worked out who you think I might be. If my belief is right, then I’d say that its extremely fortunate for you that you haven’t added up 2 + 2 correctly, don’t you ? I’m really not sure how you would have explained that one. But I can assure you that I won’t say anything to the person who I believe you thought I was. We all make mistakes and I don’t think you should have to face that. However you might perhaps be a bit more careful in the future.