Was this always going to happen? What will the situation be ten years from now?

ALEC HOGG:  In this special Boardroom Talk podcast, we speak with Dr Christopher Davidson - he's the author of "Dubai: The Vulnerability of Success".  Christopher having a look at your book and all the research and work that you've done on Dubai, it does appear to have been a city that was built on an unsustainable model.

CHRISTOPHER DAVIDSON:  Yes indeed.  To give Dubai some credit at least, they were low on oil and gas and did try and create a diverse post-oil future for their economy.  The problem is the economies they diversified into - luxury tourism, giant free zone for foreign companies and enormous real estate sector were wholly reliant on an uninterrupted stream of foreign direct investment and cheap international credit.  And of course, those things are just as vulnerable as relying on oil and gas exports.

ALEC HOGG:  Was there hubris in it as well - the world's tallest building, this incredible racecourse that's been built in Dubai and The World as they call it, reclaiming from the see - a development that actually looks like the world itself?

CHRISTOPHER DAVIDSON:  Yes, part of the problem has been that the sectors of the economy were handed over by the ruler to very powerful captains of industry who were then really pitted in competition with each other, so there's a lot of competition, each with trying to outdo the other - build a bigger island or taller skyscraper and so on.

ALEC HOGG:  And have these captains of industry perhaps over-reached?

CHRISTOPHER DAVIDSON:  Well many of them were actually demoted last week, so at least the ruler recognises this system wasn't working.  However, this took a long time to happen and one can only think that it only happened when it did because the ruler of Dubai desperately needed to send out a message that he was doing at least something.

ALEC HOGG:  The demotion - in the Middle East it's, I guess, a lot like China where face is very important.  How would that be interpreted by the people who are affected?

CHRISTOPHER DAVIDSON:  Yes, exactly the same way the political culture of the Gulf relies a lot on appearances - on titles, on the desk you occupy.  So to actually be demoted from key government positions, is effectively ostracization.

ALEC HOGG:  So those people are unlikely to come back into the business world.

CHRISTOPHER DAVIDSON:  Very unlikely, yes...

ALEC HOGG:  How badly did they mess up?

CHRISTOPHER DAVIDSON:  Well, one in particular - the conglomerate behind Nakheel which is the big property company responsible for the big Palm Island development that appears to have racked up about £45billion in debt.

ALEC HOGG:  Wow - just to go back a little bit so people who are not that close to Dubai can understand it, what is the role of Sheikh Mohammed - how hands-on is he in the economy?

CHRISTOPHER DAVIDSON:  Well it would appear in the last few months he's become a lot more hands-on and I mentioned that over the last few years he's happy to delegate much of this new economy to his loyal lieutenants.  They've clearly not served him well, so what we're seeing recently is more control being taken back by the ruler's court directed by himself and his son, the Crown Prince.

ALEC HOGG:  And talking about control was Nakheel - their £45billion worth of debt you put onto it - was it out of control?

CHRISTOPHER DAVIDSON:  Yes absolutely.  Dubai's total sovereign debt - all of the government backed companies, including Nakheel and its parent company Dubai World, probably amounts to $80billion to $120billion.

ALEC HOGG:  Here in South Africa we do have quite a strong relationship - there's a relationship on the horseracing side - South African horses go and race in Dubai.  There's also been investment here in Cape Town's V&A Waterfront is owned-owned - owned by Dubai World and Retief Goosen's golf course, Pearl Valley also.  Knowing what you do about the developments of the past few days and from what you learnt in the research for your book - how do you see the future of those investments?

CHRISTOPHER DAVIDSON:  The fire sale has already begun - perhaps not in South Africa yet - but certainly in the United States and Britain, properties that were being owned by supposed sovereign wealth funds run by the government of Dubai have had to be selling off property at cut price - at a loss in fact.  Maybe that will spread to other parts of Dubai's empire.  The big problem is that Dubai never really had sovereign wealth funds like the other oil rich Gulf States.  It was not using oil surpluses to plough into investments abroad, but rather taking on debt to buy these.

ALEC HOGG:  And how much are they under water given - we know the debt numbers are big, but the assets that are backing them?    

CHRISTOPHER DAVIDSON:  They are limited - last year we had an announcement from Dubai that they had $85billion of sovereign wealth and that could cover their $80billion of sovereign debt.  However, that sovereign wealth hasn't really materialised and no one knows exactly where it is and whether it can be brought back in time or not.

ALEC HOGG:  And when it's property I guess you're a forced seller - it's hard to realise it...  You said there have been sales - are we likely to see this accelerate?

CHRISTOPHER DAVIDSON:  Yes I think so - we've already seen a few buildings that Dubai has bought in the west that have been put up for auction already and this of course is a sign of extreme desperation having to do this, because they only bought a couple of years ago in some cases.

ALEC HOGG:  There's a lot of talk that Abu Dhabi, another of the Emirates would be prepared to bail out Dubai - what do you make of that?

CHRISTOPHER DAVIDSON:  Well I was always hesitant to subscribe to that thought.  If Abu Dhabi does bail out Dubai in its entirety then it becomes responsible for these massive debts and although Abu Dhabi is incredibly rich sitting on about 8% of the world's oil and 2% of the world's gas, it's not a bottomless pit either and it will be very reluctant to really take responsibility and shoulder these debts.  I think what Abu Dhabi would want is just to have a little bit more political control over Dubai within the United Arab Emirates Federation without necessarily having to get its hands dirty.

ALEC HOGG:  Does the firing of the advisers mean that Sheikh Mohammed himself will be able to keep face?

CHRISTOPHER DAVIDSON:  It's very difficult for Sheikh Mohammed and his Crown Prince Sheikh Hamdan to keep face now because they've clearly been duplicitous with both media and investors in recent weeks.  Just a few days ago we had the Crown Prince announce to the World Economic Forum that Dubai's economy was humming along nicely.  They clearly knew more than they were willing to let on.

ALEC HOGG:  You don't think perhaps they'd been misled by their advisers, hence the firing?

CHRISTOPHER DAVIDSON:  That's certainly possible, however, in recent weeks their ruler's court has established its control and is aware of the scale of the problem.  I think they were just hoping for an 11th hour bailout from Abu Dhabi, which never materialised.

ALEC HOGG:  That's interesting - so it isnt in your assessment then something that just suddenly became apparent to the Crown Prince and to the Ruler because it seemed out of character two weeks ago to be making these very strong statements and telling people to shut up when they were suggesting there was a problem to two weeks later, having a debt standstill... but the only thing that seems to have happened in between is quite a few people have been fired.

CHRISTOPHER DAVIDSON:  Yes and Abu Dhabi did provide $5billion of assistance last week, which hasn't really been reported much in the media, but crucially this $5billion was not to go into debt refinancing - it seemed to be specifically for Dubai to pay off foreign contractors that were getting increasingly agitated.  So it seems Abu Dhabi has already begun to attach strings to the loans it's willing to extend to Dubai.  My view is that the Ruler and the Ruler's Court have known for several months, the scale of the problem - they just essentially tried to build up a Potemkin Village to keep trust from their investors until they get some assistance from Abu Dhabi.

ALEC HOGG:  And if you were to unpack the reason behind the problems - the mercenaries that have come in there - people from other parts of the world who've been given a lot of trust and a lot of responsibility for building the dream...

CHRISTOPHER DAVIDSON:  Yes - Dubai benefited greatly from having a population of 80% to 90% expatriates - you could bring in the best people - get rid of the people who were no longer up to the job.  The problem with having that rather weird demographic is that you're not really cultivating people who are in it for the long term, nor are you cultivating people who are actually going to tell it to you how it is.  People are just simply out for the tax-free salary or investments, and then to get out of they're at some point.

ALEC HOGG:  The debt standstill, the way the announcement was handled - was that in or out of character?

CHRISTOPHER DAVIDSON:  Entirely in character - in the Gulf States over the years, we've seen national holidays and special events being used to time particularly sensitive pieces of news.  This of course, the beginning of the second Eid holiday this year and of course the US Thanksgiving.  So on the day the Dubai crash happened, yesterday of course, the S&P and Dow Jones were not in action.

ALEC HOGG:  And where do you see it going from here Christopher?

CHRISTOPHER DAVIDSON:  Well the next step is what do the foreign companies do that just haven't been paid.  Some of them have been waiting 12 or 18 months in some cases.  What do they do - do they file lawsuits and if so who against... the government of Dubai?  Well what's the point if there's nothing in the coffers?  Do they try and sue the royal family of Dubai.  After all, during the boom years, the ruling family was more than happy to have a very blurred distinction between itself and the government's wealth.

ALEC HOGG:  Is the party over - forever?

CHRISTOPHER DAVIDSON:  Absolutely yes.

ALEC HOGG:  Where would Dubai be say, in five years time?

CHRISTOPHER DAVIDSON:  I would say Dubai would be a regular city within the United Arab Emirates completely controlled by Abu Dhabi.

ALEC HOGG:  So all those buildings, all the developments that have been put there over the past couple of decades standing empty?

CHRISTOPHER DAVIDSON:  No not at all - the buildings will always be filled.  Dubai has a successful port operation, successful airline, it's just a question of who is going to be in control of them.

ALEC HOGG:  When South Africa had a debt standstill in 1985 it took six years for this country - very harsh economic conditions to repay the debt that was owed, it did manage to repay everything and remains a borrower in the international community.  Do you think that's going to be an approach that Dubai will take - that despite the difficulties it will cause - that they will in fact repay all the debt?

CHRISTOPHER DAVIDSON:  Well if Dubai and the United Arab Emirates do hope to become a genuine player in the international economy and an actual liberal economic environment.  These debts will have to be paid up at some point, they can't just write them off.  So, someone at some point will have to pay.  This means Dubai and the United Arab Emirates with it will be burdened by this debt for many years to come.  The bigger picture means that the United Arab Emirates efforts to become the regional economic super power and now going to have to pay very much a second fiddle to Saudi Arabia which will emerge as the real economic force.

ALEC HOGG:  But the question there being, will they insist that the funders, or those that own their bonds will have to take a haircut or will they take the South African route perhaps of repaying everything.  How do you read that?

CHRISTOPHER DAVIDSON:  I think they will have to be repaid - it's just the United Arab Emirates at some point when it sorts itself out and Dubai's position is clarified better.  There'll have to be a roadmap put in place by the federal government to actually pay these off.  I can't see these just being written off forever.

ALEC HOGG:  But it is a tough ride that's coming and as you said earlier, the party is over...

CHRISTOPHER DAVIDSON:  That's right - population decrease.

ALEC HOGG:  Dr Christopher Davidson, the author of "Dubai: The Vulnerability of Success".

The SAfm Market Update with Moneyweb is broadcast on SAfm 104-107fm, weekdays at 18:00 to 18:30.

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