As investors look for reassurance, Dubai offers little, distancing itself from debt crunch

DUBAI, United Arab Emirates – If global investors were looking for reassurances from Dubai that it would stand behind its massive, debt-swamped investment conglomerate, they got none Monday. Instead, the Gulf city-state seemed to wash its hands of the financial woes that have rattled world markets.

The muddled message from Dubai has fueled worries over a possible default by the conglomerate, which is involved in projects around the world – from Gulf banks and ports in 50 countries to luxury retailer Barneys New York and a grandiose six-tower hotel-entertainment complex in Las Vegas.

Many investors are hoping that the conglomerate, Dubai World, will either openly discuss restructuring of some $60 billion in debt with its creditors, or that Dubai’s larger, oil-rich neighbour, Abu Dhabi, will step in to restore confidence by promising to foot any bills.

Dubai and Abu Dhabi are the most powerful of the seven highly autonomous statelets that make up the United Arab Emirates, but their sharply different styles have long made them rivals. For any help, Abu Dhabi will likely demand a price, possibly including increased say over Dubai’s affairs.

Abu Dhabi, the seat of the UAE’s federal government, has been the more conservative, religiously and financially, relying on its oil wealth to fuel growth. Meanwhile, smaller Dubai – without any oil resources – has for the past decade been the freewheeling boomtown, racking up debt as it built extravagant skyscrapers, artificial residential islands and malls complete with indoor ski slopes.

Government-owned Dubai World has been the engine for much of that growth at home and abroad. So it was a bombshell last week when Dubai announced that the conglomerate wanted to defer debt payments until at least May.

The United Arab Emirates’ two main stock exchanges registered record declines Monday as they opened for the first time since the announcement, after a long Islamic holiday.

The Dubai Financial Market was down 7.3 per cent, while Abu Dhabi’s bourse was off over 8 per cent. Brokers said they hadn’t seen such declines in at least a year.

Mohammed al-Ghussein, managing partner of Atlas Financial Services in Dubai, summed up the day’s trading, saying, “The whole screen is red, regardless of the industry.”

Global markets levelled after heavy drops last week. Investors appeared to have a better sense of the size of potential losses from Dubai and were reassured for the moment that its woes don’t signal a new crunch for credit markets, still recovering from last year’s near-shutdown.

But the impact from Dubai’s comments Monday could rekindle the same concerns. Investors with strong exposure to Dubai had the sinking feeling that not only is Dubai sticking to the opaque ways that many feel helped cause the mess, it was continuing to deny the city-state even has a problem.

Dubai officials have largely been silent since last week and, when its top financial official made his first comments Monday, it was hardly reassuring.

Abdulrahman al-Saleh distanced the emirate from Dubai World’s debt, saying that while the conglomerate was government-owned, it was “established as an independent company.”

“Given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the (Dubai) government,” he said on Dubai TV.

Moreover, lenders should take some of the responsibility for the problems, he said, arguing that they lent money to the company on the basis of the feasibility of its projects, not on assurances provided by Dubai’s government.

Further fueling the confusion from Dubai authorities, the only other official to speak out about the debt mess was the emirate’s police chief, Lt. Gen. Dhahi Khalfan Tamim.

Tamim said Dubai faces “unfair competition” aimed at “the defiling of the emirate so that it will not be a hub for finance, work or foreign investment.” He said the Dubai government’s debts “are not worth mentioning” and shouldn’t be confused with those of local companies.

Dubai World broke its silence in a pre-dawn announcement Tuesday.

The company said in an emailed statement from the Dubai ruler’s media office early Tuesday that “constructive” discussions have begun with banks. It said the restructuring would include about $6 billion covered by Islamic bonds issued by its Nakheel subsidiary. Nakheel, which is the real estate developer famous for building Dubai’s palm tree-shaped islands, has a roughly $3.5 billion Islamic bond coming due in two weeks and it was considered the litmus test of Dubai World’s debt woes.

The conglomerate emphasized that the proposed restructuring would not include a number of its other portfolio companies, including Infinity World Holding, Istithmar World and Ports&Free Zone World.

While the statement offered the first taste of clarity for a financial world eager for some transparency, it did not deal with the broader issue of how the company and Dubai itself would deal with the overall debt.

One possibility is that Abu Dhabi will step in, more to salvage the UAE’s creditworthiness and economy than out of any filial or legal obligation to Dubai. Abu Dhabi’s rulers appear to be furious over Dubai’s handling of last week’s debt announcement, showing it by remaining silent amid the crisis.

“Abu Dhabi’s leaders have long viewed Dubai’s economic growth model as excessively risky, and they now feel vindicated,” Hani Sabra, a Middle East expert with the New York-based Eurasia Group, wrote in a recent report.

But it also can’t allow Dubai or Dubai World to fail. “Some of Dubai’s largest creditors are domestic Emirati banks in Dubai and Abu Dhabi, and Abu Dhabi does not want Dubai’s troubles to spook international investors away from the UAE as a whole,” he said.

In a move to partly allay liquidity concerns, the UAE’s Abu Dhabi-based central bank on Sunday reaffirmed it was standing behind local and foreign banks in the country by offering additional funds at a low cost.

The move was ostensibly to ward of a run on the banks. The conglomerate, alone, is responsible for about 75 per cent of Dubai’s at least $80 billion in liabilities.

Abu Dhabi could earn additional political leverage by stepping up.

Intervening “gives Abu Dhabi the leverage it needs to extend its influence more broadly across the UAE federation,” wrote Sabra.

“Abu Dhabi wants to get the message across that it will not simply write blank checks,” he said. “In the medium and long term, Dubai’s financial model will change to look more like Abu Dhabi’s as Dubai’s rulers lose political clout.”

El-Tablawy reported from Cairo and AP Business Writer Adam Schreck contributed from Georgetown, Malaysia.

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