Dubai will have to learn to live with its debts

As the saying goes: "In the midst of life, we are in debt", and never was this more true than now. The state of having a financial obligation to somebody else is so commonplace these days that the old fiscal rectitudes have gone for good, replaced by a willingness to pile on the debt in all aspects of life. We drive from our mortgaged houses in hire-purchase cars fuelled by credit-card petrol on bond-issue roads and never give it a second thought.

Even before the credit crisis, which was sparked by the mismanagement of debt on an enormous scale, the natural tendency of consumers was to load up with credit - the mirror image of debt - in all its forms. The bursting of the credit bubble has left the world struggling with a debt mountain that will take generations - our children and grandchildren - to pay off. Nobody believes the poor things will ever actually pay it. They will just become used to having even higher levels of personal debt than us, and pass that on to their offspring.

From the micro to the macro, the debt phenomenon is universal. As individuals have become used to debt-dependency, so governments will also have to adjust to the new financial morality. And none more so than Dubai. The very first US Treasury secretary, Alexander Hamilton, said a couple of hundred years ago: "A national debt, if it is not excessive, will be for us a national blessing." Back then he saw the benefits that countries, like individuals, could derive from having access to debt funding: instant access to investment cash for a new and growing country, as the US then was. The codicil, "if it is not excessive", is the crucial point.

The senior echelons of Dubai Inc must be pondering these considerations right now as they grapple with the emirate's most urgent financial issue: how to deal with the enormous levels of debt that have arisen from the global financial crisis. The credit crunch caught Dubai midway through an ambitious growth plan, funded partly by the legacy of oil wealth, although more significantly by a far more traditional system of licensing, rentier revenue and profit sharing.

This was accelerated further in the early 21st century by access to cheap capital from the international markets - debt, to you and me. The end of the global party of cheap credit has left Dubai with a severe headache. Exactly how severe has become a matter of acute conjecture in the past couple of weeks, as international lending institutions try to put a figure on the emirate's overall indebtedness.

For most of the past year, the figure of US$80 billion (Dh293.84bn) has been accepted as the benchmark for Dubai's debt, but now that is being queried. Some analysts have suggested it has gone up a few billion to about $84bn; others say it could be as high as $150bn. It is worth looking at how the original $80bn estimate came about. It was first mentioned almost impromptu by Mohammed Alabar, the chairman of Emaar, in a speech at DIFC week last November. Maybe not the place for such an important pronouncement, but at least worried financiers had some guidance.

It was later reaffirmed by Nasser al Shaikh, then the head of Dubai's finance department, in the emirate's first attempt at a transparent budget, in January. Mr al Shaikh set it in context with a detailed explanation: it comprised $10bn of government debt, with a further $70bn of debts from government-related enterprises (GREs). On the credit side of the balance sheet, he identified government assets of $90bn and GRE assets of $270bn.

The message was as clear as could be in the opaque world of Dubai public finance: the debts were big. In fact, they amounted to about 140 per cent of the emirate's GDP. But they were far outweighed by the emirate's assets. Reassurance all round. Doubts about the reliability of the $80bn figure have been rising for weeks. When the Central Bank backed a $10bn bond issue in February, some analysts simply subtracted that from the $80bn, although of course the bond should have been added to Dubai's liabilities.

Another issue was, and remains, the status of Dubai Holding, the huge conglomerate owned personally by Sheikh Mohammed bin Rashid, the Vice President of the UAE and Ruler of Dubai. Were its considerable liabilities included in the original $80bn estimate? In January, Mr al Shaikh seemed to suggest they were not. There has been no further clarification on that important question since. Most disturbing of all was the statement to NASDAQ Dubai recently to the effect that Dubai World, the other big GRE, had liabilities of nearly $60bn.

If Dubai World accounted on its own for such an amount, surely the overall level of indebtedness must be much higher, some analysts argued, even as much as $150bn if Dubai Holding is included. At that level, Dubai's debt is testing the parameters of Hamilton's rider, "if it is not excessive". Maybe the exact figure is not that important. Debt only becomes an issue when it has to be repaid suddenly, and perhaps Dubai can manoeuvre its way through a long-term repayment and rescheduling process over the next few years, fuelled by a recovery in the world economy and a resumption of the Dubai growth strategy.

But I suspect Dubai, like all of us, is going to have to learn to live with, and even love, its debt mountain for years to come. [e-mail]