Abu Dhabi has completed its due diligence of Dubai and decided that its neighbour’s assets aren’t worth the paper they’re written on.

 

After initially being given $10 billion, the brash emirate of Dubai was expecting another $10 billion – it got only half that amount.

 

Dubai had been trail-blazing, setting the example for it neighbours, trying to diversify its economy from exposure to oil, and it was doing that by buying up companies around the world and hoping falling oil revenue would be replaced by profits from these businesses.

 

The problem is, the global recession has meant profits have declined, assets aren’t worth the inflated prices paid during the boom years. The strategy of cheap money, remortgaging, that caught home owners out, has also trapped Dubai.  

 

Creditors will be praying that they get something back from their investments and reluctantly will go along with the Dubai’s request for a standstill on debt repayment. With property prices declining more than 50 percent, Dubai World’s property developer Nakeel is looking like a basket case.

 

The emirate, ruled by Sheikh Mohammed bin Rashid Al Maktoum, borrowed $80 billion from international investors to fuel the boom. But what is unclear is what local banks in the Gulf Co-operation Council loaned to Dubai. It all will come out in the wash.

 

Dubai is on its own for now  - until Abu Dhabi steps in. But that won’t happen until it sees clarity in Dubai’s financial position. Dubai needs to keep diversifying but, at some point in the next decade, the oil is going to run out.

 

The model of buying businesses overseas is not working out. Dubai will have to consider imposing a direct income tax on the people that work there. It’s an unpalatable thought but it has to be done. How else will it run its government institutions, replace roads, or build more track for its metro to run on?

 

At that stage expect an exodus of expats. What Dubai needs is to rethink its dependence on foreign workers. That’s called sustainable growth. In its efforts to mimic the city states of Singapore and Hong Kong, one key ingredient it forgot was the local population.

 

Singapore has a population of almost four million indigenous people, and on its door step, in Malaysia, it has all the cheap labour it needs to keep its industry ticking.

 

Fault lines in the plan for a single currency are emerging.

 

Dubai’s neighbours - Abu Dhabi, Qatar, Kuwait and Saudi Arabia - have more than enough oil and gas to fund their growth this century. Whereas Oman and Bahrain are in a sinking ship!

 

Abu Dhabi will carry Dubai and the other emirates into the single currency despite its dispute with the Saudis over where the central bank should be based.

 

But the question is, at what price will Abu Dhabi carry its neighbour?

 

If anyone missed the shifting sands, the Dubai Air Show should have been an eye opener. For the first time the biennial show was opened by Dubai's Sheikh Mohammed and Abu Dhabi’s Crown Prince, Sheikh Mohammed bin Zayed Al-Nahyan.