TO the dismay of free market enthusiasts, West’s financial crisis has arrived on the shores of the Gulf and hit Dubai, the emerging global financial hub, with a bang bringing to an end its gold rush status. As a result, most of its posh development projects are being put on hold, tourism is about to decline and, for the first time, the emirate is even thinking of collecting taxes, something unthinkable hitherto.

One may recall that Dubai and the six other emirates that make up the United Arab Emirates, gained independence in 1971. Dubai, though a commercial crossroad, had always been an extremely backward place and happened to have its first concrete building in 1956. It used the Indian rupee as its currency until early 1960s.

Abu Dhabi, on the other hand, has been home to over 90 per cent of the country’s oil wealth and the centre of the political power of the federation. Incredible though it was, it took hardly a decade for Dubai to grow from a tiny desert oasis into a global market-place, attracting millions of investors and tourists with ambitious projects.

Now a cold wind is blowing through the Gulf. The price of oil, lifeblood of its economy, has fallen more than 60 per cent since its mid-July peak. Real estate, the other mainstay, especially in oil-poor Dubai, has been quick to follow. Insiders say that prices, which rose about 14.4 per cent in the first eight months of this year, have suddenly dropped by 20-30 per cent, with some properties seeing a decline of 50 per cent.

With prices of fancy apartments falling and sales grinding to a halt, leading developers such as Nakheel, are halting construction and laying off staff. Nakheel was developing several iconic projects, including three palm-shaped man-made islands, only one of which is completed, and a cluster of islands shaped like a map of the world. It also announced last month a plan to build a one-kilometre-high tower, which would overshadow the still unfinished Burj Dubai, the world’s tallest.

Morgan Stanley and Goldman Sachs, which saw the Gulf as one place where business does not dry up, are now trimming their office staff. In the wake of the downturn, credit has dried up, stock exchanges have crashed and the Sovereign Wealth Funds, created to save for a future when there will be no oil, have also lost billions of dollars as a result of oil price plunge. Many Pakistani investors, who took much of their wealth, legally or illegally, out of their country to profit from Dubai’s property boom, have suffered huge losses.

Dubai government now owes $10 billion and its state-affiliated firms $70 billion, which its spokesman Mohammed Alabbar says it could pay, but a tightening of mortgage lending, freezing of liquidity and real estate slowdown have made life harder for Dubai. That is roughly equal to Dubai’s $80 billion GDP. Dubai’s assets, he says, are about $350 billion but analysts say only a fraction of that can be turned into cash.

Dubai’s downturn is seen more difficult to handle because its property market is relatively new and is turning sour very fast. It would put many small developers in distress. Speculators, a driving force in the real estate, are likely to walk away from properties they have bought on small deposits to resell them quickly.

Emaar Properties’ shares have fallen by about 85 per cent so far this year. Then, unlike other Gulf Arab oil-exporters that built their infrastructure development projects on petrodollars from six years of soaring crude oil prices, Dubai is leveraged. Some projects in real estate will either not meet their completion dates or may not be completed at all. Many of these projects were designed to lure western investors but at a time when even the affluent classes in the West are rethinking their spending, it may be too much for this desert state to expect.

However, it is not all doom and gloom. Maybe in three or four years, many believe, Dubai can regain its momentum. With demand still high, the market can recover fast. Meanwhile, the downturn in Dubai’s economy has led to a collective rethinking about the country’s direction. The fundamental question is: would the United Arab Emirates respond to the problems as one country or as seven separate entities, with Dubai in particular taking a go-it-alone approach? The chances are that the crisis could ironically end up strengthening the federation.

It is generally believed that when Dubai gets into trouble, it is bailed out by its neighbour, Abu Dhabi. So, the rescue process has begun and is being handled at the UAE federal level, with Abu Dhabi providing whatever funding is needed. Trading in the shares of two major mortgage finance companies, Tamweel and Amlak Finance, was suspended on November 20. The two companies, which account for about 50 per cent of the mortgage market, are now being merged into a new entity called the Real Estate Bank of the UAE.

In addition, the UAE as a federation has guaranteed all bank deposits for three years and has earmarked about $33 billion for support of the banking system. Although the capital is coming from the central bank but, as one analyst put it, “all money in the UAE comes from Abu Dhabi.” Of course, Abu Dhabi ultimately has the capital to meet the needs of Dubai and other emirates in the UAE, but a massive bailout could be uncomfortable for it.

While Abu Dhabi officials sometimes criticise Dubai for its fast life and loose culture, they would not want to see them fail. After all, a meltdown in Dubai would hurt Abu Dhabi as well.

The big winners of the moment look to be the Saudis, who as far as is known, have largely eschewed risky investments for the safety of government bonds and other conservative instruments. Long derided for propping up the US budget deficit in exchange for low returns, the Saudis now look well-positioned to maintain their own huge domestic development plans.

When Dubai kicked off a Gulf Arab property boom in 2002 by first allowing freehold property ownership, it could do so without federal

approval.