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Dubai mega-project dreams evoke 2008 crash for banks


A new project of a district featuring the world’s biggest mall, and a complex of five theme parks, may cost as much as $43 billion to build. Pic: Bloomberg

Dubai: Dubai, gearing up for a new development boom, will need to prove to lenders and investors that this one won't end like the last. With the same bravura that turned the emirate into a hub for finance, tourism and real estate, the government is pitching massive projects in the hope of inspiring investment even as banks and builders remain buried under debt from the property-market collapse in 2008.

"They are floating a trial balloon to see how the market responds," said Jim Krane, a researcher at Cambridge University's Judge Business School and author of the 2009 book "City of Gold, Dubai and the Dream of Capitalism." Dubai has excelled at "soaking up the excess liquidity in an oil-rich region. The city's game is to create schemes to channel some of that liquidity to itself."

Two projects announced last month, a new district featuring the world's biggest shopping mall, and a complex of five theme parks, may cost as much as $43 billion to build, according to Emad Mostaque of London-based investment adviser at Religare. There are also plans to construct a replica of the Taj Mahal four times the size of the original, and revive other developments that stalled four years ago.

Very creative

"Dubai is going to have to be very creative on how it finances these projects," said Ghassan Chehayeb, research director for the Middle East and North Africa at Exotix. "The traditional debt-fueled building boom is not going to work this time and the financing capacity and appetite is just not there."

Dubai government officials were unavailable for comment, a spokeswoman said on Sunday.
The property crash pushed Nakheel, the developer of Dubai's palm-shaped islands, to the brink of bankruptcy and led former parent Dubai World to clash with about 80 banks as it pushed to renegotiate terms on $25 billion of debt.

Concern over Dubai World in late 2009 caused equity markets including the New York Stock Exchange to drop and hurt crude oil prices. Dubai racked up about $113 billion in debt on its transformation. About $7 billion matures next year and another $56 billion from 2014 to 2016, Bank of America Merrill Lynch said in an October 2011 report.

Moody's Investors Service downgraded Dubai's biggest banks on December 7, saying they hadn't done enough to address the bad loans that piled up in the crash. Banks in the city have set aside 30 per cent to 45 per cent of the value of the non- performing loans, compared with 72 per cent to 96 per cent for similarly-rated lenders globally, Moody's said.

Loans and advances from banks in the United Arab Emirates, which includes Dubai, grew 2.7 per cent in the first eight months of the year, down from an average of three per cent in 2011, according to central bank data.

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