DUBAI, 30 August 2007 — The Gulf emirate of Dubai is making headlines with a series of high-profile investments abroad in everything from aircraft builders to Las Vegas amusement, but some deals are financially risky and could even spark a protectionist backlash, economists say.
Dubai has been snapping up foreign assets in tandem with a vigorous drive to turn the thriving city-state into a global business and leisure hub hosting the world’s tallest skyscraper and palm-shaped artificial islands.
Acquisitions by the Gulf emirate’s investment vehicles “are in tourism, services and logistics, and make sense since they are compatible with the diversification of the economy at home,” said Eckart Woertz, economics program manager at the Gulf Research Center, a Dubai-based think tank.
“But it is a risky strategy because there is a lot of debt involved. They borrow money to finance the acquisitions,” he told AFP.
Standard Chartered economist Mary Nicola said Dubai, a member of the United Arab Emirates federation which also includes Abu Dhabi, is looking for long-term assets at a time when its own oil reserves are dwindling.
“Diversifying the portfolio of assets also has long-term benefits,” she said, although “we have to wait and see” if the investments turn out to be profitable.
Government-controlled or backed firms and investment funds have chased strategic targets such as European aerospace giant EADS, owner of Airbus, in which Dubai International Capital bought a 3.12 percent stake, and brand names like the upscale Barneys New York retail chain, which Istithmar, another investment arm of the emirate, wrested from a rival Japanese bidder.
Dubai World last week said it will pump around $5 billion into a 9.5-percent stake in the MGM Mirage entertainment company and half of its CityCenter development in Las Vegas.
Despite the fiasco suffered by Dubai Ports World last year when US congressional opposition forced it to offload US operations included in its purchase of British shipping giant P and O, other firms are bidding for assets that have sparked objections on the receiving end.
Dubai Aerospace Enterprise is vying for a majority stake in the company that runs Auckland International Airport, while Borse Dubai is competing with Nasdaq to take over Nordic stock market operator OMX.
Entities like Auckland airport and OMX are considered “critical resources, so you will see a sense of protectionism on the part of the foreign entity,” Nicola of Standard Chartered Bank told AFP.
In a recent article, the GRC’s Woertz noted that the “financial protectionism” displayed toward DP World last year “is not confined to the United States.
“Germany recently discussed a special law to ward off unwanted foreign buyers of strategic national companies... Other European nations like France, Italy and Spain already have more advanced national industrial policies than Germany,” he wrote.
Woertz said Dubai’s attempts to diversify its revenues were similar to the economic diversification pursued by neighboring Gulf states on the back of high crude prices.
Indeed, assets managed by other Gulf funds, including the Abu Dhabi Investment Authority (ADIA) next door, dwarf those held by Dubai.
“Whereas DIC manages equity of $5 to $10 billion, assets managed by ADIA are estimated at up to $875 billion, and the Kuwait Investment Authority is estimated to manage assets of $160 to $250 billion. But they don’t talk about it,” he told AFP.
In contrast, “Dubai’s investments are always high profile. They make a lot of noise,” Woertz added.
Nicola said that moves to expand overseas assets can be seen across the Middle East and Asia, notably in China.
But Dubai’s acquisitions are “surrounded by publicity, and targets like OMX and MGM Mirage are very high profile,” she said.
“Kuwait is now investing in Indonesia, for example. (But) it will not hit the headlines.”
