• Where all your money is being used

    Where all your money is being used

  • Dubai’s rapid development has relied on significant debt financing and on attracting capital inflows, making it vulnerable to global credit tightening. total external debt is $80b or 148% of 2007 GDP.   Recently the government has been insisting that its assets outstrip debt and that it has adequate funds to pay off any debts belonging to Dubai’s  quasi-sovereign companies (“Dubai Inc”) and its banks
  • UAE’s total external borrowing from global banks remains much lower than Abu Dhabi governments assets but even the assets of Abu Dhabi’s sovereign funds may be smaller and less liquid than authorities might prefer now that they are involved in suporting banks and the property sector through the new consolidated mortgage lenders
  • Alabbar: Dubai’s sovereign debt of $10b and $70b of associated companies is much smaller than its assets ($360b in assets)
  • Dubai International Financial Center Investments,  the investment arm of the Dubai International Financial Centre and has stakes in Deutsche Bank and Euronext, said it had mandated Goldman Sachs to raise $350m at Libor plus 250 basis points to help pay off its outstanding loans. If it can not raise such funds it will pay off the debt with funds from the government.
  • FT: DIFC’s loan may be the first refinancing since the credit crisis worsened in September, its size is modest when compared with the larger loans maturing from other government affiliates, such as offshore developer Nakheel and exchanges group Borse Dubai.
  • Fitch: Dubai’s non‐bank foreign‐currency debt is  just under $70bn (from a total of an estimated $170b for all the emirates). Of this, three‐quarters is owed by majority state‐owned enterprises, and a further 9% by companies in the Dubai Holdings group. Dubai corporates — both public and private — had about USD11bn of loans maturing in the final quarter of 2008, some of which has already matured or been refinanced. In 2009, Abu Dhabi entities have more debt maturing than  those in Dubai (just over USD8bn and USD5bn respectively), the majority of it public sector. Dubai’s public‐sector maturities should also be manageable. However, Dubai’s maturities step up significantly in 2011.
  • Moodys: Dubai Inc.’s leverage (including the government and government-owned companies but not banks) has risen close to US$ 50 billion, exceeding the Emirate’s 2006 GDP (the latest official GDP figure available). Given the increase in Dubai’s debt, its ability to provide a systemic bail-out now relies more heavily on support from the government of Abu Dhabi and/or the federal government
  • On DIFC: As with other entities controlled by the government of Dubai, there is no explicit government guarantee on DIFC debt. However, the strategic and symbolic importance and high public profile of DIFC, coupled with its operational closeness to the ruler and Dubai’s financial strength, lead us to conclude that the government can, and will, intervene if DIFC Investments faced financial difficulties.

Dubai

Has the bubble burst?

Nov 27th 2008 | DUBAI
From The Economist print edition

As the sheen comes off glitzy Dubai,

the other Gulf states are getting nervous too

“THEY said you couldn’t create islands in the middle of a city,” shouts a property advertisement over a jammed Dubai motorway. “We said, what’s next?” The range of answers has become gloomier by the week, as the debate moves from whether the Dubai property bubble will burst to just how bad it is going to get. Some nervous bankers think property prices could fall by 80% or so in the next year or so. A few months ago, rich foreigners who had bought villas in Dubai were complaining about the quality of the sand on their artificial beaches or the difficulty of getting water to circulate around the twiddly fronds of the man-made island shaped like a palm. Now prices for some smart developments have been cut by 40% since September, shares in property firms have lost 80% of their value since June, and big developers are laying people off.

The region’s banks will suffer too. Gulf policymakers are still making cheery statements about the region’s limited exposure to subprime loans but are quieter about heavy investments in inflated local property markets by regional banks, particularly Islamic ones. But worried banks are sharply reining in their mortgage lending. A series of arrests of senior businessmen as part of a fraud investigation is also making people twitchy. There is even talk of a coming “Gulf Enron”.

While the stunning opacity of government economic data is increasing the air of uncertainty, Muhammad Alabbar, who heads Emaar, a giant state-controlled property developer, took the rare step of telling people how indebted the country is. Together, the government and state-owned enterprises owe $80 billion—148% of GDP. Dubai still has a far larger stock of assets, at least some of which are likely to be sold, to cover the debts, to Abu Dhabi or the federal sovereign-wealth fund of the seven-state United Arab Emirates, of which Dubai and Abu Dhabi are the two richest.

The rest of the Gulf has met Dubai’s phenomenal boom with a mixture of envy and emulation. Now there are hints of pleasure at the idea that the epicentre of bullishness may be humbled. But there are worrying questions for the others, too. Could the Dubai property slump prove contagious? Will the Gulf Co-operation Council pull together to protect the region’s economy? Should its planned monetary union be set aside as governments focus on protecting their own currency?

Who do we listen to now?

Since everyone else has been trying to copy Dubai, it is unclear how economic policy should be reshaped if the model has to be rescued. Advisers who have been preaching free markets and foreign investment will have a tougher time as economic power shifts back to the more conservative, oil-rich governments such as Abu Dhabi and Saudi Arabia.

Political stability may be affected too. A worsening economy may encourage political reform, on the assumption that people can be more easily bought off in times of plenty. At a recent BBC debate in Doha, Qatar’s capital, on whether Gulf Arabs value profit over people, young Qataris said critics of their countries’ poor treatment of foreign workers should look on the bright side; local citizens benefit from large gifts of land and free university education. Since the oil boom began in 2003, mega-rich Qatar has ramped up public spending by an average of 28% per year; the less well-endowed states have had to make do with annual rises of some 15-20%.

Several GCC economies will go into budget deficits next year for the first time since at least 2002, including Saudi Arabia, whose budget is based on oil at around $50 a barrel but excludes the cost of Saudi Aramco’s massive programme of capacity expansion. Unemployment will rise as thousands more young people, many of them graduates with high expectations, enter the job market. Social unrest is likely to brew. The question is whether governments will meet it with repression or political concessions.