Job Discussion Forums

[ckhl]

...What you won't read about in the Gulf News

Dubai's bail-out

The outstretched palm

Feb 26th 2009
From The Economist print edition


Abu Dhabi bails out its neighbour. What will it ask in return?

THE Jebel Ali port in Dubai boasts of being the largest man-made harbour in the world. Its �quad-lift� cranes can hoist four 20-foot containers at once. The port�s second terminal will raise its capacity to 14m containers. But plans for a third terminal look premature. Dubai is suffering from a slump in the trading, lending, holidaying and profiteering that buoyed this remarkable emirate for so long.

On February 22nd Dubai was hoisted out of its financial trouble by its oil-rich neighbour, Abu Dhabi. The central bank for the United Arab Emirates (UAE) bought $10 billion-worth of Dubai�s five-year bonds. The bail-out confirmed everyone�s assumption that Abu Dhabi would not let the second-biggest member of the UAE fail. But its benefactor waited long enough to plant a seed of doubt in people�s minds. In recent weeks, the spreads on credit-default swaps for securities issued by Dubai�s government and several of its biggest corporations have widened alarmingly, if a little hysterically.






Having long ago depleted most of its oil reserves, Dubai has reinvented itself as a �sell-side� emirate, dreaming up ingenious schemes for other people to invest in. Chris Davidson of Durham University, who has written a history of the emirate, describes it as a �spongelike economy�, designed to absorb foreign money. The government imposes few levies (Dubai has no income tax) and accounts for only $10 billion of the emirate�s debts. But its rulers sponsor an extended family of companies. Between them, these corporations have amassed about $70 billion of liabilities (see chart), adding to a debt pile that almost matches the emirate�s 2008 GDP of $82 billion.

On the other side of Dubai�s ledger, the government claims to have $90 billion in assets on top of the $260 billion held by its corporations. But it has not revealed the composition or liquidity of its holdings. The very fact that it had to turn to its neighbour for help suggests that its own family silver is not that easy to sell.

The bond proceeds will allow Dubai to meet its obligations this year (which amount to about $10 billion-15 billion) and probably next. But what will Abu Dhabi ask in return? On the face of it, not much. Tristan Cooper, of Moody�s, a rating agency, had expected Abu Dhabi to be �a bit more fussy� about how the funds were used. It might, say, have taken equity stakes in Dubai�s freewheeling corporations or sought some control over their managers.

But Mr Davidson thinks the unstated price of Abu Dhabi�s support will be stiff indeed. �It is the end of the second emirate�s economic autonomy, which it has fiercely protected,� he says. Why else did Abu Dhabi put Dubai through �months of pain and humiliation�, if it did not see some long-term gain from chastening its neighbour and strengthening the UAE federation, Mr Davidson asks. Dubai will now have to be more accommodating of its neighbour�s wishes, he says. It will, for example, have to forgo its independent foreign policy, which had seen it become Iran�s outlet to the world, even as Abu Dhabi kept a careful distance.

Dubai will also have to �lose its ambitions to become the Monaco of the Gulf,� Mr Davidson says. Abu Dhabi will insist on greater prudence and Dubai�s go-getting rulers may also now feel defeated. Their economic ambitions were driven partly by their political insecurities. �A lot of the urgency we saw in the last ten years was fuelled exactly by Dubai�s need to keep its autonomy,� Mr Davidson says.

But for all Dubai�s woes, the Gulf still needs a financial centre, a port, and a secure place to live, Mr Cooper points out. With a little less gumption and a lot less gearing, �Dubai is plausible�.

[veiledsentiments]

[15yearsinQ8]

re citibank/group
everyone knows they getting BURNED
prince talal had 40% of his assets in one company - citigroup . so much for a super clever money man, i guess he didn't it when warren buffett wrote the memo about diversifying
even kuwait investmet authority , the govt's investment arm, put money into citi (and madoff too)
toxic assets are worldwide and not just subprime homes outside of vegas

but these were all preferred stocks.... which the newspapers say will all be common stocks, imagine the horror of gulf money managers having mere common stocks ! the abu dhabi and kuwait funds are needed for decadesand the prince frankly needed to feel 'the pain'

[kiefer]

???

[veiledsentiments]

I can't see that happening as long as their main income is from oil... and thus a constant inflow of dollars.

The AD investment in Citigroup is right now in notes, neither preferred nor common, but it is tied to a common stock conversion in X number of years. Of course, AD planned to have sold off the notes by then, but now their value has tanked. They will hold them for their good income for the moment and wait and see...

Lots of the gurus of investment have egg on their faces right now... Buffet... and Prince Talal. ...and the free flow of cash with no rules, especially over the last 8 years has made the Ponzi scheme the investment of choice...

VS

[Never Ceased To Be Amazed]

Hi, all: To be absolutely accurate, it isn't really "Prince Talal"...he's actually a bin Talal. His actual given name is Waleed.

In the height of hubris...I don't say "pinnacle" as I don't believe he has a pinnacle!...he decreed about 10 years ago that he was, from that point forward to be referred to as "Al-Waleed". You know, 'cuz he's all that!

I refer to him as "Wally". Sorry, dear prince, to be so disrespectful of your "hindness"!

Jes' my TCW.

NCTBA

[Sheikh N Bake]

This was all a part of Reagan voodoo economic theory that Bush and cronies found in a mayonnaise jar on Funk & Wagnell's porch. Ignorance, stupidity and gross incompetence trickled down to cronies like Heck-of-a-Job-Brownie and all his other frat-boy loser pals. So the SEC was apparently busy having chugalugs, and the others...'nuff said, right? Well, there's a new sheriff in town.

Nattering nabobs of negativism can pooh-pooh all they want, but I wouldn't advise betting real money against him. And I'd bet a frothy beer they won't, no matter how much hot air they produce.

[ckhl]

I wonder if we might not at some time see a Korea-like restriction on how much each passport can send out of the country each month.

It would never happen. They'd lose most of the expat labor they depend on. And for all this talk of "Emiratization" and supposedly big investments in education, roughly 90% of the private sector is staffed by expat workers. This will remain so until conditions in the public sector are brought more in line those of the private sector. No Emirati, if given the choice, is going to slog in the private sector when he can find a sinecure in some goverment office or the police. Or better yet, when he can engage in rent seeking. Remember that when students tell you they want to be "businessmen", what they really mean is that they want to open a shop or whatever and staff it with foreigners who'll manage it. Their only involement amounts to stopping by occasionally to collect the fee they charge for their sponsorship.

[Sheikh N Bake]

That's generally true. we must realize that the main priority, drinking tea with friends, is time-consuming.

[kiefer]

y'know--I gotta turn off 103 point something in the morning and listen to more music, books on tape, songs of the whales, something other than every man for himself market forecasts. But the radio hosts are veddy British and how can I not have faith in what they're predicting when such natural erudition automatically goes part and parcel with those BBC 1 accents?