Business, Economics, Economy, Macroeconomy, MBA, Microeconomy, Private Equity, Thoughts

Dubai has financing troubles but… is it making a profit?

More than two years ago I was writing about Conspicuous consumption: from Thornstein Veblen to Jumeirah Palm. The reference to Dubai was almost mandatory of course. I’ve been to Dubai and I like the place. We all know that recently it has run into some trouble financing its debt. They are expecting a bailout from the United Arab Emirates which are playing hard to get.

My personal view is that they will get this bailout. Actually, I have little doubt of it. They must be now in the midst of a power struggle about how to manage all that. We have to remember that many western nations rushed to finance banks only to discover that they had forgotten to write down a few conditions in the contract about the remunerations to top managers and suddenly the public opinion cared more about those millions’ destination than for the rest of thousands of millions.

Leaving that aside, Dubai is similar to a long-term investing fund. In the long run you get your returns, not before. To manage it you need to be very cold, and not let the circumstances blind you.

But everything in Dubai is so shiny that it blinds you. That’s good for the brand, of course. So we have this dilemma: building shiny things maybe is not that good for the long run but, what else do you have to sustain your brand that very very shiny things?

No matter what happens now, the shiny brand is not so appetising anymore. And investors will think twice before risking again. I don’t want to compare Dubai to a Ponzi scheme, it is not, but to achieve the desired returns it needs to be able to sustain the investments arrival for a long-term period. Is it going to?

Since I’m not the Delphos’ Oracle I leave the reflection here. A small hint: it’s all about fundamentals. In the long run, an investment will survive and flourish if its a sound business. If we are dependent on a brand that requires too high a burning money rate, probably it won’t.

Having investors is a thing, when you lose them you can resource to forced investors (also called taxpayers) or stakeholders that have other interests (power in exchange for money, for instance) but, having a big enough profit for the expected yield, that’s another thing…

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