Dubai's bubble bursts as it caps building spree

The booming city of Dubai showed signs its economy was starting to crack Monday as it began cutting state spending ,capping its building spree and merging its lenders in the face of the global financial crisis.

World business leaders met Monday for a four-day conference at the Dubai International Financial Center (DIFC) where financers were set to discuss Middle East coping strategies as well as how to help sinking western economies.

Dubai officials remained optimistic at the annual meet but seemed to cave under world pressure as they revealed for the first time the level of debt the emirate has accumulated during one of the world's biggest building sprees.

"Dubai is not immune to the problems caused by the global financial crisis, but the region is better placed than most to deal with the issues arising," Mohammed al-Abbar, a member of the Dubai Executive Council and chairman of government-owned Emaar Properties said.

He added that total company assets were more than $350 billion while total debts were just $80 billion.

Dubai's sovereign debt stands at $10 billion while the debts of state-affiliated firms amount to $70 billion, he said, broadly in line with external estimates.

In response to ongoing speculation that Dubai may not be able to meet its debt obligations Abbar said: “Let us put an end to this speculation … and let me state categorically, that the government can, and will, meet all its obligations going forward; so please have no doubt about this fact.”

He noted that Dubai had been growing at a rate of 13 percent to 14 percent a year and that a slowdown would be welcome. "

“If this comes down to six percent or seven percent or eight percent then fine. We've been running a long time and could probably do with a breather. We will use this time to learn lessons and become a stronger city," he said, seeking to put a positive spin on the crisis.

Dubai is famous for manmade islands in the shape of palm trees and the world map, an indoor ski slope in the desert and a reputation as a shopping haven.

The emirate recently staged an extravagant $20 million party complete with a massive fireworks display and a star-studded guest list to launch the opening of luxury resort Atlantis, the move was criticized as over-the-top considering the current global turmoil.

Mergers and bailouts

The annual conference comes hot on the heels of a massive merger of troubled Islamic property lenders Amlak and Tamweel, whose shares were suspended from trading on Sunday.

The property finance groups, with total assets of around $7 billion, merged under the supervision of UAE Real Estate Bank Sunday, creating the largest real estate finance institution in the country.

Such moves may be common fare during a global financial crisis, but in Dubai, the government's actions are not called a bailout or even a rescue but "a milestone development" for the country's financial sector and analysts are loathe to use such loaded terms publicly.

"I think this is a bailout. This is a government takeover," said one UAE analyst who declined to give his name, citing the sensitivity of the issue -- another sign of just how politically charged words become in a region where corporate governance is in its infancy.

Recent developments reveal how the crisis has torn through the Arab Peninsula, thought immune from the crisis until recently due to massive sovereign savings and earnings from energy exports.

With much of Dubai's economy based on its booming tourism and property market the crisis means the emirate is cash-strapped and in urgent need of a bailout.

“It’s been ten times worse than expected. The liquidity is absolutely frozen. There’s no money. It’s just gone. If the Government doesn’t act really quickly, we’ll slip into an Indonesian-style bust,” the U.K.'s Times Online quoted one of Dubai’s leading bankers, who did not want to be named.

Abu Dhabi's role

Despite the recent bailouts, a term officials steer clear from using, Abbar dispelled speculation that the emirate was headed for a major bailout from the UAE capital, Abu Dhabi.

Dubai is not in talks with the federal government of the UAE to receive direct financial assistance and needs no such aid, Abbar told Al Arabiya TV on Monday.

"Dubai has received no offer either directly or indirectly from Abu Dhabi or any other party on earth… this negotiation does not exist and this help is not needed," Abbar said.

Wealthy Abu Dhabi, one of the world's biggest oil exporters and dominant member of the UAE, has long been expected to bail out Dubai, which has virtually no mineral resources but has made an audacious bid to become a regional trade and tourism hub.

"Abu Dhabi, as the main backer of the UAE government, is lending its credibility to the Dubai real estate sector in a nutshell," said Eckart Woertz at Dubai-based think tank Gulf Research Center.

The UAE, the world's fifth-largest oil-exporter, is a seven-member federation that includes the Gulf trade and tourism hub of Dubai and is led by the emirate of Abu Dhabi, which is home to most of the country's oil.