Does Wall Street's bust threaten Dubai's boom?

Given the current worldwide financial situation, this has been a hot local conversation topic:

Dubai and its real estate market are vulnerable to an international economic downturn, especially compared with many of its Gulf neighbors. As the region's premier business, transportation and tourism hub, it is by definition more entwined with the global economy. And in tight times, Dubai lacks the windfall oil profits that have enabled sister emirate Abu Dhabi, for example, to amass a financial cushion in sovereign wealth funds totaling hundreds of billions of dollars.

But Dubai's biggest risk is its daring reliance on debt to drive its breathtaking building boom. Last week, Moody's estimated that in 2006, the most recent year for figures, Dubai's government and public-sector company debt was at least $47 billion, a staggering 103% of GDP. The investment-rating agency said it expected Dubai's debt to continue outpacing GDP for another five years, exposing Dubai to pronounced financing and geopolitical risks.

It's no secret that Dubai's mind-boggling frenzy of development is highly leveraged; a particularly severe credit crunch could conceivably shut everything down. Moreover, a global economic slowdown not only means less of the international investment on which Dubai depends; it also means lower oil prices, which dampens the regional economy that Dubai serves as a key trade, travel and finance hub. All this makes the Emirate especially vulnernable to a worldwide economic downturn.

Given these facts, people here have reason to be concerned. But will the current economic environment result in a financial catastrophe for Dubai? Will money, jobs and, ultimately, the imported labor force flee, reducing the city to an apocalyptic landscape of empty streets, abandoned shopping malls, half-completed skyscrapers? That's unlikely:

All is not doom and gloom, however. The UAE government has funneled $33 billion into the country's banking system to calm the nerves of depositors and investors, promising coverage to foreign as well as local institutions. If the credit crunch shakes out speculators, known as "flippers," from Dubai's real estate market, that could help stabilize wildly inflationary conditions. "I am not necessarily thinking we are in a crash scenario," EFG-Hermes managing director Hashem Montasser tells TIME. "There is still genuine demand. Economies here are still growing. Overall, the economic situation is still very sound. We will see a deceleration of prices, and it's probably a good thing, as long as it's done in an orderly way and doesn't turn into a panic. The market has gone to where it is too quickly."

There might actually be a silver lining to all this. If the aforementioned "flippers" that are currently bidding local housing prices up to insane levels are forced out of the local market, housing prices will decrease and the result will be relief to the hundreds of thousands of people who are currently struggling to afford to live here. Furthermore, a slowdown in the city's wild and bewildering orgy of development - described as "madness on a megalomanic scale flying in the face of any single principle of responsible farsighted urban planning" by one local blogger and decried as an "ecological distaster" by a Pritzker-winning architect - might not be such a bad thing. A couple of years ago, I wrote about what I perceived as "construction fatigue" among people living here. Two years later, it's apparent that this fatigue has worsened. Maybe if the pace of new construction slowed, allowing existing projects and needed infrastructure (from the Dubai Metro to wastewater handling facilities) to be completed, the city could "catch its breath" as it absorbs and assimilates all this new development into its physical and social fabric.

At any rate, a complete collapse of Dubai's economy is probably unlikely. For all its vulnerabilities, it also possesses some advantages:

An underlying reason for the relative lack of panic so far is that Dubai real estate remains a financial haven for wealthy individuals from riskier nearby countries like Iran and Pakistan. What's more, Dubai's real estate sector is dominated by a handful of major companies — collectively dubbed "Dubai Inc." — that are directly or indirectly owned and controlled by the government. This means, analysts say, that Dubai authorities could effectively stave off a bubble burst by keeping finished projects off-line until market conditions improved. In the event of a systemic threat, Dubai can probably rely on super-rich Abu Dhabi for a bailout. "We consider it highly likely that the authorities will step in at some level to support entities that are strategically important for the economy," Moody's analyst Tristan Cooper tells TIME.

In other words, Dubai's boom might slow down, but - barring some regional catastrophe such as a war - this place isn't likely to go bust just yet.