Economies: Dubai pops its own bubble

Official inflation rates in Dubai put the cost of living increases this year at somewhere around 20%. Residents and visitors alike wonder where those figures are coming from because it often seems as if everything has doubled in price since March. Of course, that is an exaggeration but there is no doubt that everyone is trying to make as much money as they can before a crash hits.

This weekend, it did.

As late as early last week, five star hotels were holding fast on room rates and boosting their per person prices for event delegates and making demands for minimum figures up 50% from six months ago. One hotel told The Financial Crime Forum that its car rate from the new Emirates-only terminal three was AED180 against a website quoted price of AED80. They claimed it was much further but using an ordinary taxi, the car passed the previously used terminal within less than two minutes. The same hotel demanded AED168 (around GBP35) per day for internet access via DoCoMo's InTouch service - although when logging on and signing up the service said it cost AED75 per day (the amount the hotel did in fact bill despite its written quotation demanding more).

But signs that things were already slowing were at the very plush T3. Of course, it has built in capacity for expansion of flight numbers and also to take account of Emirate's ambition to turn Dubai into a global hub. Even so, last week one could have sprayed the arrivals hall - and the departure lounges - with firehoses and not got anybody wet. Compared to just a few weeks ago when there were crowds going in and out, this was a significant turnaround.

The huge new Wafi mall, home to many international and home-grown brands, plus restaurants and a pseudo-souk, was all-but deserted last Wednesday afternoon and evening. Sales signs were going up throughout the mall.

Taxi fares seem, on a totally unscientifically estimated basis, to have doubled. Eating out, and even worse drinking, have become so expensive that they are almost a sign of ostentation.

Property prices have increased so much that salaries now have to compete with or exceed those in London to attract and retain executives and those that are in post are finding that rent has risen to the point that even formerly high salaries are now being squeezed.

Even last Thursday, the day before Dubai's weekend, many people were still talking up the good times. Some bankers and others we spoke to, however, were already looking at signs that things were not going to keep on the same track. First to go, they said, are property prices.

By Sunday, the figures were in - property prices in some areas were falling fast as inbound money from Russia, Pakistan and other points of origin slowed dramatically. Some developments have reported as much as a 40% drop in demand. That's having a direct impact on the developers' ability to complete projects.

Forcing the issue is mortgage lenders. Put in fear of part-completed projects, several have refused to lend on stage payments. Fearing a significant downturn, one has decided that to lend into the inflated market is foolish and has suspended all lending until prices have fallen to a point where it feels safe. Some banks, monitoring companies' performance, have identified businesses that they consider at risk - and have taken the step of restricting credit to employees of such companies.

The irony is that Dubai has flourished in a model that has been seen before: the Emir wouldn't like to hear it described as such but, like Hong Kong until 1997, Dubai has become a kind of free-wheeling, business-centred environment run under a form of benevolent dictatorship. It is, in many ways, far more progressive than many of its neighbours and certainly more progressive than, say, Malaysia or Indonesia. Whilst holding true to basic Muslim principles it has not sought to apply them in a manner that restricts progress, rather it has positively encouraged modernisation within a less restrictive interpretation of Islam than in some states.

The result has been a phenomenal success story, and one which will no doubt be managed without turning a crisis into a catastrophe, in part because there remains - under the veneers of freedoms - some tight central controls.

But for many businesses, the time has come to recognise that they cannot keep milking customers out of every last drop for the very globalisation that has facilitated Dubai's development as a regional and then global financial centre also means that capital that flowed in can equally easily flow out again.

And as times get tough, the basic question is going to be this: can anyone really be expected to not care what things cost? Somehow one doubts it.