Is Dubai the next Casuality of the Global Economic Crisis?

As US markets are crashing and burning (except for today) rumors are starting to circulate in the financial markets about another crash--Dubai. There has been a dramatic surge in borrowing by Dubai to build massive super structures like the world's tallest tower, Palm Tree island and off course lets not forget stakes in US banks.

According to Moody's Investors Service, around $47 billion is owned by government-controlled companies which is more than Dubai's gross domestic product. It is expected to accumulate debt faster than their economy is growing. Irrational exuberance is high-the city announcing another mega project-Jumeira Gardens that will cost $95 billion.

What is really scary about the government owned companies is that they have become larger than Dubai itself. Giyas Gokkent, chief economist at National Bank of Abu Dhabi, is saying, "If anything were to go wrong with any of these companies, Dubai does not have the wherewithal to deal with it.''

Several causalities are already emerging in the market from Dubai. Dubai World bought a 10% stake for Kirk Kerkorian's MGM Mirage last year. It cost them almost $5.1 billion. The stake is now down 80% to $16.80 per share from $84. DP World, a company that bought Peninsula and Oriental Steam Navigation Co for $6.8 billion in 2006 has seen it market capitalization drop 55% this year on the Dubai International Financial Exchange.

Unlike Abu Dhabi, Dubai's oil revenues have been dwindling for some time. The ruler Sheikh Mohammed bin Rashid al-Maktoum has borrowed in order to boost earnings from tourism and finance. ADIA (Abu Dhabi Investment Authority), which is the world's largest wealth fund, is managing between $250 billion to $875 billion. A comparable might be CALPERS in California that is managing $25 billion. Abu Dhabi owns more than 90% of the UAE oil reserves.

Dubai's approach is now raising eyebrows in the Middle East and other financial markets over concerns that the global credit crunch will increase defaults while company assets and real estate value decline. The Dubai model has worked for a while which has been "build and everyone will come" but now everything has changed. There are rumbling in the financial markets that their moody rating might be in jeopardy. Maybe this long awaited crash of Dubai is finally here? I would not worry yet since they have a very rich parent that can bail them out--Abu Dhabi...