Dubai World's failure to pay its debts on time sparked a crisis last November – a year on, the emirate has lost its confidence and its autonomy

Dubai will never be the same again. The tourists will still fill Jumeirah's golden beaches, the traffic will speed dangerously along Sheikh Zayed Road, the hedonistic bars and night clubs will still pulsate into the early hours.

But the past year has utterly changed the ethos of the glitzy Gulf emirate. The crisis that exploded a year ago has dealt a serious blow to Dubai's self-confidence and its grandiose plans to be the Middle East's financial capital.

The events triggered by what is known locally as 25/11 – the date on which Dubai World, the heavily indebted conglomerate, told its creditors that it could not repay about $25bn (£15.6bn) of debts as planned – will continue to have profound effects on the economic, financial and political character of the emirate.

Dubai will recover, and may even in time regain some of its swagger, but it will be a long process and the emirate that emerges at the other end will not be the same brash millionaires' playground it was in early 2007.

In February of that year, Dubai's hubris was at its peak. Sheikh Mohammed bin Rashid al-Maktoum, its ruler, forecast that by 2015, Dubai would be "an Arab city of global significance, rivalling Córdoba and Baghdad". That his benchmarks were the two urban jewels of Muslim culture at the height of the medieval Islamic empire demonstrated the scale of the ambition.

The financial crisis has dashed that vision forever. The strategy was predicated on annual growth in gross domestic product of 13.5% a year – always an ambitious target but now in the realms of fantasy.

Simon Williams, chief Middle East economist at HSBC, believes that GDP for the United Arab Emirates as a whole (Dubai is just one emirate out of seven making up the federation) fell by nearly 2.9% in 2009, and will rise by a modest 2% this year and 4.1% next. Given that most of that will be led by the oil-rich capital Abu Dhabi, it is likely that Dubai's growth will be negative this year and flat in 2011 – not the stuff of Islamic imperial dreams.

"Although Dubai's recession is probably over, we fear the economy will struggle to regain momentum this year and into 2011," Williams said. "The emirate continues to be weighed down by the excesses of earlier years."

Others are even more pessimistic. Christopher Davidson, reader in Middle East politics at Durham University and author of a study of Dubai, said: "Dubai is still very much in the midst of its crisis, as its decade-long misadventure into real estate still has a good few years to play out due to much more supply hitting the market and much more debt reservicing."

Boomtime



The Dubai real estate boom was fuelled by the government's decision to allow foreigners to own property in the emirate in 2002. The explosion in property prices that followed reached its peak in early 2008, when some apartment and villa prices were appreciating 10% in a week. For a country without significant reserves of oil in an energy-rich region, property became Dubai's equivalent of the black gold, driving economic growth.

Those days will probably never return. JP Morgan, the US investment bank, recently forecast that property prices would continue to fall until they bottomed out at 80% below 2008 levels. The fall is currently estimated at 50%-60% of those values. There is more pain to come in Dubai property.

More than half of the near-1,000 real estate projects in the emirate have been cancelled, according to government statistics. Some of the big prestige developments – such as the tallest building in the world, the Burj Khalifa – have been completed or are still in progress but the bread-and-butter projects of the construction industry have been shut down. Orders for cranes, which once dominated the city's skyline, have fallen 40%.

With property in the doldrums, Maktoum has had to rethink the strategy. Now, according to the government's revised plan, the focus will be on those core activities that made Dubai a thriving commercial hub before the cheap-credit property boom: transport and logistics, the re-export business, retailing, leisure and tourism.

The role of the financial services industry in this new scheme is uncertain. If the bust of 25/11 was sparked by property, its most obvious effects were apparent in the financial sector. Overnight, liquidity dried up and credit was almost impossible to find. Credit default swap prices soared to Icelandic levels. Banks that had lavished borrowings on Dubai's corporations in the good years prepared for the inevitable hit to their balance sheets.

Dubai World's decision to appoint a chief restructuring officer (CRO) – the British accountant Aidan Birkett, hired from Deloittes – showed the interdependence between property and finance. Many of the conglomerate's big liabilities were contained within its Nakheel subsidiary, the developer of the manmade islands that include Palm Jumeirah and other "lifestyle waterside developments", which came to symbolise the emirate's brashness.

Birkett, a plain-speaking Geordie with experience of some of the biggest corporate collapses in recent British history, saw the link between property and finance early on. "Fix Nakheel, and you go a long way to fixing Dubai real estate; fix real estate, and you fix Dubai," he said.

Birkett's strategy was largely successful in persuading Dubai World's banks to play ball. Appointed on 25 November last year, by May he had secured the agreement of a majority of creditors, and in October he was able to quit the CRO role with his job done and 100% of creditors signed up to the rescheduled repayment plan for its $25bn liabilities.

But Dubai is far from out of the woods. The Dubai World debts will now be repaid in five to eight years, at lower interest rates, but those repayments still have to be met. By any measure, the emirate still has a mountain of debt.

The International Monetary Fund estimates its total indebtedness at $110bn, including the debts of central government, government-related companies such as Dubai World, and other corporations. This is about 140% of GDP – putting the emirate above Greece and Ireland in the world debt league.

Compounding Dubai's problems, much of this debt falls due in the short to medium term. Some $24bn is repayable between now and the third quarter of 2012, suggesting that a raft of restructurings – smaller than Dubai World but still onerous – are likely soon.

Dubai Holding, the conglomerate owned personally by Sheikh Mohammed, which owns the Jumeirah hotels brand as well as the emirate's once gung-ho private equity group, Dubai International Capital, sent a shiver through UAE markets just before the Eid al-Adha holiday last week with a statement that it was in talks with bankers to restructure its $12bn or so of debts. It had missed two big debt repayments, and is in serious risk of a formal default. It promises a resolution by the end of this month.

As well as rescheduling, Dubai has also said it will sell assets to repay debts. Some of these will be baubles that the emirate picked up on international markets in the boom years, from the New York retailer Barneys to the Canadian entertainment group Cirque du Soleil and the cruise-liner QE2.

Family fallout

Others possibly earmarked for disposal or flotation on international markets include the indigenous businesses built up as part of the core economic strategy: Jumeirah hotels, Emirates Airlines and the DP World ports and shipping group (which contains the old P&O business bought in 2006).

"Is Dubai going to sell the family silver to pay for its profligacy? That would be a big blow to its pride," said a local banker.

In particular, another branch of the UAE family might object. Abu Dhabi, the biggest emirate, which plays Washington to Dubai's New York, will want a say in the fate of these and other assets regarded as core to the UAE's global strategy. There are already plans to merge the Dubai and Abu Dhabi stock markets, and there has been open speculation about Abu Dhabi taking over Dubai's huge new airport, the modestly named Dubai World Central.

Perhaps the most significant change of the past year has been the relationship between Dubai and the far richer but more conservative Abu Dhabi. The capital bailed out Dubai with $20bn of loans at the height of the crisis. These also have to be repaid and it is likely that Abu Dhabi will ultimately want a different kind of return.

Davidson said: "For the first time in 170 years, Dubai has lost its de facto autonomy, given that its creditor and lifeline is now oil-rich Abu Dhabi, which has clear and unashamed ambitions to centralise the UAE federation and curb any autonomous macroeconomic or political activity within its borders."

Apart from the possibility of Abu Dhabi taking over Dubai's assets, this new subservience to the capital could make itself felt in two other ways, both with serious implications for Dubai: the setting of the emirate's budgets within the overall federal financial structure; and its relationship with Iran.

If Abu Dhabi set caps on the emirate's autonomous borrowing powers, it could hinder Dubai's ability to debt-finance its recovery; and if, at American urging, the capital forces Dubai to halt much of its trade with Iran, which is just across the Straits of Hormuz, it would seriously impair the role of Dubai as the region's commercial hub.

Iran is the UAE's biggest re-export partner, with trade worth about $7bn accounting for 17% of its total re-exports. Most of this goes through Dubai, and its loss would be a big blow, both financially and culturally.

Dubai still has big advantages over other would-be financial capitals in the Gulf: the region's best infrastructure, the most liberal and cosmopolitan environment of any Gulf state and a dynamic can-do ethos compared with that of other Arab countries.

But a year of living dangerously has changed all the previous assumptions. Now Dubai is getting back to basics, but with more uncertainties and less self-confidence than ever.