Friday, December 4, 2009

Dubai, Abu Dhabi And Debt

If Arabic has an equivalent to schadenfreude, it's probably being muttered in Abu Dhabi right now.

While Dubai has been the glamour emirate of recent years, expanding flashily and purposefully as a regional tourism and financial hub under its ruler Sheikh Mohammed bin Rashid Al-Maktoum on the back of foreign investment, it will be oil-rich Abu Dhabi that will be bailing it out. The state-backed investment company, Dubai World, is having to restructure and has asked creditors for a six-month "standstill" on repayments on $60 billion of its debt.

With that will come a quiet reassertion of the previous pecking order in the United Arab Emirates, of which Abu Dhabi is the capital.

A sign of that came early this year. Dubai's foreign investment fueled development was brought up short when the global credit crunch hit in 2008, sending property prices reeling. In February, Dubai was having trouble refinancing a $3.8 billion loan. The UAE central bank, backed by Abu Dhabi, bailed it out with a $10 billion bond, indicating that Dubai's troubles were deeper than apparent.

On November 24, just three days after Crown Prince Sheikh Hamdan bin Mohammed Al-Maktoum had told the World Economic Forum meeting in Dubai that the emirate's economy was "humming" and the chairman of Emaar Properties, one of Dubai's large property developers, told the same meeting that the emirate's economy was likely to grow by 5% in 2009, Abu Dhabi provided Dubai with an additional $5 billion loan.

The day after, Dubai made its restructuring announcement which itself came ahead of the refinancing of a $3.5 billion Islamic sukuk bond due on Dec. 14 by Nakheel, a subsidiary of Dubai World and the emirates largest property developer (it built the emirate's iconic palm-shaped artificial resort-island).

Abu Dhabi has little choice but to continue to bail out Dubai. A financial collapse of the emirate would make it unlikely that Sheikh Mohammed or Sheikh Hamdan could remain in power as the government and the ruling family's management of Dubai Inc. are so closely intertwined. That could be politically unsettling for the region as many of the states are likely to be tarred with the same bush by investors as Dubai. Following the restructuring announcement, credit default swap rate on Dubai debts rose by more than 100 basis points, taking it to 434 points, comparable to the level that Iceland incurred at the height of its crisis.

By continuing to underwrite Dubai, Abu Dhabi will be able to impose strict conditions on the emirate and to rein in the Dubai ruling family's autonomy. That low-key approach to political realignment with, no doubt, an eventual succession to power of an Abu Dhabi friendly member of the al-Maktoum family, would fit better with the Gulf States's culture. It would, though, leave Dubai a lesser, chastened place, resorting to its old role as a regional entrepôt, with its ambitions as a world city left in the sand.

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