DUBAI: From Boom to Bust in 4 Years

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DUBAI: From Boom to Bust in 4 Years

Posted by Alex Finkelstein 12/02/09 9:00 AM EST
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(DUBAI, U.A.E.) -- Silent for almost a week, the controversial Dubai World organization announced Tuesday (Dec. 1) it will seek new financing for $26 billion of its total $59 billion debt load. But the Dubai emirate itself will not guarantee the new funding.

Burj Al Arab Hotel - Dubai

However, neighboring state Abu Dhabi said it would help but didn't spell out the possible pledged amount. Dubai World officials didn't disclose where they might find the rest of the new funding.

Dubai World asked creditors Nov. 25 to hold off legal action on the total debt owed.

Nakheel, the development arm of Dubai World, on Monday, Nov. 23, asked for three of its Islamic bonds, worth a total of $5.25 billion, to be suspended on Nasdaq Dubai until it was in a position to "fully inform" the market.

In Great Britain, meanwhile, four major banking houses worry that their combined $50 billion in loans to Dubai World may vanish with the new restructuring, according to the London press.

Sheikh Mohammed bin Rashid

The banks are HSBC, Standard Chartered, Barclays and RBS.

As creditors around the world watch and await new financing developments in Dubai, the state's ruler, Sheikh Mohammed bin Rashid was reported to be in London assuring high government officials that the money crisis in his country was being overplayed by an aggressive media, British newspapers are reporting.

In Dubai itself, some government officials are challenging creditors at a time when they need their partnership most.

Abdulrahman al-Saleh

"Creditors need to take part of the responsibility for their decision to lend to the companies," Abdulrahman al-Saleh, director general of Dubai's Department of Finance, said in a prepared government statement.

"They think Dubai World is part of the government, which is not correct."

Saleh's remarks came in an interview with Dubai TV, a station owned by the ruler of Dubai, Sheikh Mohammed bin Rashid.

Saleh stated that while the government of Dubai owned Dubai World, the conglomerate had long operated as a stand-alone entity and was never guaranteed by the emirate's government.

John Sfakianakis

"It deals with all parties on this basis and it borrows based on ... its projects and not the guarantee of the government," Saleh said.

One independent Mideast watcher who didn't buy that view was John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group.

He told Reuters the distinction between the Dubai government and the flagship company appeared minimal.

"What role does the sovereign play? This continues to create uncertainty," he said from Riyadh. "Their motivation is to make a distinction between the two, but the difference ... is nebulous."

Saleh argued the market reaction to last Wednesday's announcement by Dubai World, which initially shook global financial confidence, was exaggerated.

Sultan Nasser al-Suweidi

"The restructuring is a wise decision that is in the interest of all parties in the long-term but might bother creditors in the short term," he said.

Another official was more pointed, the state news agency WAM quoted Sultan Nasser al-Suweidi as saying.

"I have advice for foreign investors. They should study available investment opportunities and conduct realistic feasibility studies to make sure they are real opportunities with no risk,"

The head of a Dubai budget committee said the government's own debt was $10 billion.

Dhahi Khalfan Tamim

"Dubai government's debts have been declared. They are only 10 billion. There should be no confusion between (the government) and any company," Dhahi Khalfan Tamim, also Dubai's police chief, told Al Arabiya television.

Comments from investment banks and capital institutions were quick and pointed.

"They have confirmed there is going to be a restructuring and are doing what they can to differentiate between the government and companies," Mohieddine Kronfol, managing director at Algebra Capital, told Reuters.

"It doesn't take away from the fact that you have a major potential event that is unraveling. People's expectations aren't going to be met with this announcement."

Michael Ganske

Michael Ganske, head of emerging market research at Commerzbank in London, said a default, which could ultimately benefit the region, "is becoming more likely.

"At the end of the day it should be positive for Dubai, Dubai's sovereign risk should go down," he said.

Michael Geoghegan, CEO at HSBC, one of the four big London banks facing a loss of their loan, says he is "confident the leadership of Dubai and the UAE will overcome any short-term problems they face, which appear to have been somewhat sensationalized, and continue to lay the foundations for sustainable growth."

Norval Loftus

Norval Loftus, head of Islamic debt at Matrix Group in London, notes Dubai "took on huge debt at the worst possible moment. It's a pretty toxic combination of over-expansion and bad timing."

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