Nick Hood says Dubai remains reluctant to face its demons - and the worst may be yet to come.

Sixteen months since first experiencing Dubai’s financial mirage, the initial impression is that not much has changed in the Walter Mitty Gulf state. A romantic dinner for two at Pier Chic, looking out onto the graceful seven (yes, seven) star Burj Al Arab will cost the unwary host around $700 with a relatively average bottle of vino.  

All of the 46 restaurants at the Madinet Jumeirah complex were full, possibly signalling the last hurrah of the European tourists who, according to rumour, are starting to abandon the 'Disneyworld in the Desert' experience offered by this and the country’s other ‘deluxe’ leisure facilities.

Appropriate, then, that this should have been the chosen venue for an international conference of insolvency experts, who found themselves sharing BA business class on a Sunday evening with the serried ranks of the Dubai World restructuring team, returning for another week of hard toil trying to break through the cloak of denial that still obscures the reality of Dubai’s vast financial over-indulgence.

With Western newspapers commenting on the report by Moody’s that local banks faced $15bn exposure to Dubai World, it was curious to hear a senior Dubai official dismiss these stories as part of an American plot. The US, it seems, wants to pressurise governments in the Gulf to engage more proactively in the campaign to bring Iran to heel over its nuclear ambitions. It seems that conspiracy theory is now well practised in the region.

So all is not well, despite continued growth in the GCC area of 2.2% through the recession, a ‘minor’ correction to the average of over 6% between 2003 and 2008. The Dubai stock market fell 3% last week, but more revealing were the nervous expressions of hope that the Dubai International Boat Show might inject life into the moribund Middle East yacht market. When the super rich start going cold turkey on Bling, things must be tough.

Without any meaningful oil revenues of its own, Dubai is not a victim of energy price corrections, at least not directly; rather, it is simply suffering from its own extravagance. Forced now to play a high-stakes game of financial chicken with its sugar daddy up the highway in Abu Dhabi, it can only be hoped that the current tentative sense of reality will take a firmer hold.

In the meantime, relatively little pain is being felt by entrepreneurs meeting in plush hotel lobbies, or ex-pat professionals in their over-priced luxury offices in the Dubai International Financial Centre.  
The real problem for many of them is still to come, in the shape of worldwide Dubai-related carnage in the construction industry. Things are particularly bad in the UK as contractors, big and small alike, wake up to the nightmare of disputed contracts on abandoned projects in Dubai - projects that they rushed headlong into without proper consideration of the risks involved. Many of these deals were done without the protection of an international arbitration clause, leaving builders with the only option of suing for their unpaid millions in Shari’a courts. The sobbing is already audible - and for most, it will end in tears.