Two years after its debt crisis rocked global markets, Dubai has emerged as a safe haven in a troubled region, reaping the benefits of building strong service and tourism sectors.
But the Gulf emirate, which has so far succeeded in restructuring its mountain of debt, could face tougher conditions if it seeks refinancing in a sickly international market, while a global drop in demand could harm its core sector, analysts say.
Before the global financial crisis struck in 2008, drying up its main source of funds, the economy of the desert city of skyscrapers had been growing at breakneck speed.
The emirate's fortunes took a further blow in 2009 when it warned on November 25 that its largest government-related entity (GRE) Dubai World needed to freeze repayments on some $26 billions of debt, triggering fears of a sovereign debt default.
Its gross domestic product contracted 2.4 per cent that year.
That statement raised the international focus on weak countries in the bond market, adding to the spotlights on Greece which was soon to become the first domino in what is now the eurozone debt crisis.
But in Dubai the sluggishness in the economy was followed by a recovery in 2010 as Dubai negotiated debt restructuring and began to quarantine problem assets.
Economic growth stood at a mere 0.5 per cent last year, and is expected to be at least 3.0 per cent this year thanks to expanding transit trade and flourishing tourism, although the property sector remains subdued after shedding more than half its value.
"Dubai has planned, and started, to address its debt issues through all possible channels: restructuring, refinancing, asset selling but also simply through GDP growth, which improves the debt ratio dynamic," said Philippe Dauba-Pantanacce, a senior economist at Standard Chartered Bank.
"Dubai's amount of debt certainly did not vanish but it has not prevented the core assets of Dubai's growth engine from registering a healthy acceleration this year," he told AFP.
"All major sectors of Dubai's traditional assets -- trade, tourism, retail sales, infrastructure, and transports -- have been strong contributors to the emirate's growth this year."
Tourist arrivals grew 14 per cent in the first half of 2011, while hotel occupancy rates rose over 80 per cent, according to regional investment bank EFG-Hermes.
It said that high occupancy was evident during the summer as many Gulf tourists avoided troubled traditional destinations like Egypt and Syria.
Dubai's trading sector has also been growing.
Container traffic increased by 11 per cent in the first half of the year, according to EFG-Hermes, which said ports could also be benefiting from diversions due to the regional uncertainties.
"Dubai stands out in the region as it is benefiting from its safe haven status, particularly in areas such as tourism, trade, and banking sector deposit inflows," said the bank.
The financial crisis hit the bustling city at a time when it was building larger than life projects with a set of superlative aims, including the world's tallest towers and the largest man-made islands -- big plans for which it borrowed heavily.
Projects that were completed or nearly completed by the time the crisis hit escaped its paralysing effect, but many others -- mostly now deemed unrealistic -- stayed at the drawing-board stage.
"The mood has completely changed; the hyped hubris of the past has gone -- people are much more realistic now," said Simon Williams, chief economist for the region at HSBC.
He argued that the after effects of the "boom and bust cycle" are still around.
"Real estate is still weak, access to bank credit is still tough and Dubai's international reputation has yet to be rehabilitated," he pointed out.
But he highlighted the comparative advantages that put Dubai on the right track to achieve steady growth.
"The emirate has, by far, the best physical infrastructure, most tolerant social system in the Gulf, and most entrepreneurial risk taking private sector," said Williams.
"Its stability during a period of widespread regional unrest has further enhanced its appeal," he told AFP.
It has also become more affordable for companies and investors after years of high inflation.
"Before the crash, Dubai was tax-free but an expensive place to do business. It is still tax free, but with real estate down by half and wages flat, it is much more competitive than it was before and that's key for its long term prospects," he added.
Fears of narrowing access to international finance due to worsening global conditions could harm Dubai which has to refinance its obligations. The emirate's GREs reportedly have nearly $14 billion of maturing debt next year.
"Dubai risks remain if there is a marked deterioration in access to foreign funding for a sustained period, given Dubai’s significant refinancing obligations," EFG-Hermes said.
But the emirate should not face a problem meeting its short-term debt servicing obligations, putting them at $600 million in the fourth quarter of this year, it said, adding as restructuring continues, difficulties would likely be a result of "external shocks rather than domestic."
A drop in global trade due to the escalating eurozone crisis, could also affect Dubai which has established itself as a transit hub for trade.
"A protraction of the eurozone turmoils could translate into a further erosion of global demand -- dampened by market stress and collapsing consumer confidence," said Dauba-Pantanacce.
"As the most open non oil economy in the region, Dubai would suffer from a dramatic fall in global trade as it did in 2008," he warned.