Dubai has the World at its feet and in the Palm of its hands. Perhaps one can have sympathy for the emirate’s rulers (both past and present) because they were beguiled by those profligate promoters with their mesmerizing models.
When the emirate started pondering its future as “Dubai without oil” almost two decades ago, it was almost like the Wild West in terms of money-making ideas and hype. Scions hardly out of their nappies and armed with swaggering American and English accents, and some with a penchant for Jaguar and Aston Martin cars, and ambitions as expansive as the Trans-Siberian Railway, could not wait to influence their highnesses with the wisdom and efficacy of this project or that.
They were prematurely promoted to positions which under normal economic circumstances would have been unsustainable because they were not qualified to take on the challenge of re-inventing Dubai from the re-export hub and sleepy dhow port it had been for centuries.
Many became rich through this surreal state of affairs. Everybody was living in a state of denial, although there were lone voices warning of the coming doom through market corrections and the real economy catching up. There were already isolated indicators that corporate governance in Dubai was seriously lacking. Financial scandals in the flagship Dubai Islamic Bank, the SOLO Company and one or two others even resulted in a public spat between the chief of police of Dubai accusing the governor of the UAE Central Bank of not doing his job properly.
Thanks to the knock-on effects of the credit crunch and the global financial crisis, Dubai’s world has come crashing down to earth with a vengeance. The investment bank, Calyon, estimates Dubai’s total debt at $80 billion, of which $50 billion is held by the government entity DP World, which in November asked creditor banks for a “standstill” agreement to give it some breathing space so that it could negotiate an extension to its debt maturities. One payment that falls due this month (December) is the periodic payments on the $3.52 billion sukuk of Nakheel, a subsidiary of DP World, the developer of the now notorious and profligate Palm tree island project. The Nakheel sukuk has lost a third of its value in the last month with the pricing collapsing to 72 points from 111.
In October, the Dubai government clarified its direct sovereign obligations totaling $20.3 billion equivalent, which were largely due in 2011.
In his latest report “Dubai: After the Plunge”, John Sfakianakis, chief economist, Banque Saudi Fransi-Credit Agricole Group, highlighted market perceptions about the Dubai financial crisis. Concerns about Dubai’s potentially crippling default on enormous debts to global creditors, says Sfakianakis have rattled investor confidence across the oil-exporting Gulf region. Dubai’s reputation has been impacted in a major way and it will be difficult for the emirate to recover from the negative backlash in the medium to long term.
Sfakianakis is more optimistic about the help forthcoming from Abu Dhabi and perhaps other GCC (Gulf Cooperation Council) countries. “However, we believe that Abu Dhabi will come to the rescue... but like all rescues it will have a price. In that case it may well be first of all a political price. Abu Dhabi is bound to suffer from the contagion from Dubai for the short term, but we expect UAE capital will be in a position to overcome any risk profile pressure. At the same time, credit quality deterioration simply is not an issue in Saudi Arabia, Abu Dhabi and Qatar and we expect that in the short term, investors will calm down and begin to differentiate between “good” and “bad” bets in the Gulf region,” he explained.
In the past, Dubai could have relied on the late Sheikh Zayed Al-Nahyan of neighboring oil rich Abu Dhabi to bail it out. Not anymore. The house of Al-Nahyan is now run by a more market savvy and investment conservative new generation of scions who are more interested in developing their emirate than underwriting the excesses of their cousins down the highway.
Indeed, international rating agency, Fitch only last week predicted that Abu Dhabi’s support to Dubai would remain selective and indirect. This is partly to protect its own balance sheet strength and its creditworthiness as underlined by its AA long-term foreign currency issuer default rating. But it is possible for Abu Dhabi to bail out Dubai directly as the clarity and extent of Dubai’s indebtedness emerges. Not surprisingly, some consultancies such as Hatfield Philips have warned that Europe may suffer a “double dip” in the commercial real estate market in 2010 in the UK. Matthew Grefsheim, director, special servicing, warned that “a double dip, whilst not guaranteed is a real possibility and this has been heightened by the recent news regarding Dubai World. What we hope to see is a gradual return of liquidity, and not a sudden surge as this could depress prices across the board, and could pose a threat to any loans and therefore properties that are already in default.”
But the good news is that the Islamic finance sector on the whole perceives the Nakheel and DP World as a local problem, unlikely to result in a contagion especially in the cross-border sukuk market. Asian regulators stress minimal or no exposure to DP World, so has a spate of GCC banks including Arab Banking Corporation which in an unusual one sentence announcement said that the group has no exposure to DP World.
Saudi bankers, especially, buoyed by the announcement recently of Muhammed Al-Jasser, governor of the Saudi Arabian Monetary Agency (SAMA), that the Kingdom’s banks had minimal exposure to DP World and Nakheel, confirm market sentiments that this is a local problem but warn that all the GCC countries should learn from the mistakes of Dubai. They are concerned that one or two other GCC countries, for instance, are also overexposed to “trophy” real estate developments rather than real economy developments especially infrastructure and middle and affordable housing of which there is a massive shortage in the GCC economies too.
More importantly, some of the regulators and bankers privately are concerned about the lack of transparency and disclosure in the GCC financial markets, which ultimately boils down to the systems of governance in these countries. As such it is important, in the case of Dubai that the House of Maktoum too accepts its part of the responsibility in the current financial debacle of Dubai.
The Islamic finance sector Dubai of course has been impacted also by the troubles at Amlak Finance, the Islamic mortgage finance provider owned by Emaar Properties, and Tamweel, another Islamic mortgage provider. The two companies are expected to forge a merger in January 2010, although discussions have been ongoing for over a year.
Some GCC financial entities are also rallying to help Dubai. Rasameel Structured Finance Company, a Kuwaiti-based Islamic investment company is trying to set up a working group of all GCC & MENA capital market creditors of Nakheel and Dubai World to ensure a unified position is presented to the Dubai Financial Support Fund (DFSF) and the chief restructuring officer (CRO) in respect of the above creditors.
According to Rasameel CEO, Issam Al-Tawari, the key objectives of the working group will be to create a unified platform for addressing the interests of the GCC/MENA creditors with the DFSF and CRO; and to ensure that an equitable settlement in the interests of all GCC/MENA capital market creditors is achieved.
