Goodbye Dubai

[Jet II]

I don’t see what the big deal is.

The markets today were in a bit of a tizzy because the Dubai World Group, a holding company owned 100 percent by Dubai’s government, and Nakheel, a wholly owned subsidiary of Dubai World, imposed a debt restructuring and debt service standstill - failed to perform on their debt or, in ordinary if not legal language, defaulted on their debt. The combination of the Islamic holiday of Eid and the Thanksgiving holiday in the US boosted the magnitude of the financial market kerfuffle.

I don’t see what the big deal is. Dubai has experienced for most of this decade the craziest construction boom seen in the Middle East since the construction of the Great Pyramids. That boom turned to bust - as booms invariably do. Property developers tend to be highly geared and very procyclical in their revenue flows and access to the capital markets. During construction slumps they drop like flies. Because the property sector is risky (ask Donald Trump), its creditors tend to get better interest rates than the sovereign rate. Dubai is no exception to this rule. If you earn a risk premium during good times, you should not moan when the borrower defaults from time to time when the going gets tough.

The debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. The sole shareholder may be the state of Dubai (indistinguishable from its ruling family), but limited liability applies to governments as well as to private entities. The government of Dubai is under no legal or moral obligation to provide an ex-post guarantee of the debts of the Dubai World Group and Nakheel. The creditors will have to manage this contingency the way God meant them to: hoping for the best, but living with the restructuring and taking their losses. Requiring the debt holders to live with their losses will not damage the reputation of the Dubai sovereign. The only way a bail out by the Dubai sovereign of the debt holders of Dubai World and Nakheel would enhance the sovereign’s reputation would be by enhancing its reputation as a sucker.

Iteresting view from the FT

[Geebz]

Ironic how a little over a year ago oil was $147/ barrel. Back then every aviator I know in the Gulf (and I know a few) would brag about their great fortunes as a result fo the Arab World's new wealth.

Meantime, those same govenments (Saudi, Emirates, Kuwait et, al) were warned time and again to bring oil down (many employed the speculators that forced oil higher) or they risk severly undermining the world economy... which as we all know is now what happened. Now all Arab debt is being brought to question.

I have no sympathy for the investors, caveat emptor. Nor do I have any concern for the governments whose arrogance acted as the catalyst to bring this whole mess about.

I don't believe the rulers will learn much from this either. When a kid can have his parents bail out his poor financial decisions, he'll never learn. His spending habits remain more or less unchanged. Same goes for Dubai. AD has been bailing them out time and again. Why wouldn't they expect yet another bailout, just as Lehman Bros arrogance that the US Gov't would do the same for them, ala Bear Sterns and AIG?

Read about Shumpeter: "Creative Destruction." While not excactly the same here, IMO, it's basic premise must be allowed to occur in order to allow markets to efficiently become more transparent. So long as bailouts are provided, very few learn any lessons. Corruption and fiscal sloppiness continue. Dubai is no exception.

[flying lid]

Abu Dhabi "picks and chooses"

Breaking news on Al Jazeera

Abu Dhabi is moving to bail out on a selective basis the state-owned Dubai World, whose debt default led to a sharp drop in global markets, a senior official has said.

The unnamed official told news agencies on Saturday that the United Arab Emirates' wealthy capital would "pick and choose" how to assist its debt-laden neighbour

Al Jazeera English - Business - Abu Dhabi to 'assist' Dubai World

Lid

[Dune]

Tons of divergent views out there because of the "info vacuum" created by Dubai.

I think this is a well balanced analysis:

This post is a guest contribution by James Pressler* of The Northern Trust Company.

Over the past few years, Dubai has built a reputation not just locally but worldwide. As the fastest growing of the seven emirates making up the United Arab Emirates, it has become known for its astonishing creations - the largest manmade islands (three at latest count), one of the world’s largest ports, and the Burj Dubai - the tallest manmade structure in the world. Unfortunately, its latest creation is not receiving the same kind of oohs and ahhs. The announcement on Wednesday requesting a six-month payment freeze on the $59 billion in debt issued by Dubai World, a state-run conglomerate behind all this grand development, made markets shudder at another prospect - the largest sovereign default since Argentina in 2001.

While technically this week’s announcement does not yet constitute a formal default, international markets are treating it like one. Credit default spreads have broadened to what one analyst called “Icelandic” levels, investors have cut back positions and headed for the safety of the US$(?), and everyone is reconsidering just how safe some safe bets are. If a shamelessly-wealthy Gulf country could potentially default, what about countries with rising debts, huge deficits and shaky recoveries?

The complexities of the UAE’s governmental structure make the situation difficult to grasp at first glance, but the problem can be captured by a few basic points. First, Dubai is the second-largest emirate in the UAE next to Abu Dhabi, but Abu Dhabi is also the power of the national government and has been challenged by Dubai’s meteoric rise. Next, the UAE has a sovereign wealth fund estimated at one half-trillion dollars in case of emergency, so money is clearly available at the national level to bail out Dubai if that route is chosen. Lastly, the national government wants to emerge from this situation with international markets assured that a state-run entity has the backing of the government and will be subsequently subject to reform and accountability. Taken together, these points plus an appreciation of the politicial undercurrents suggest a scenario that avoids outright default.

In our base case, Abu Dhabi offers support from a national level so Dubai World can meet its financial obligations and implement some debt restructuring, all in exchange for ownership of significant Dubai-owned assets - Emirates airlines has been suggested in recent reports. In addition, Abu Dhabi forces Dubai World to restructure its business model from the dysfunctional “build it and they will come” ideal. These conditions would satisfy Abu Dhabi’s emirate-level interest in retaining dominance while also securing the national interest of retaining some international market confidence, all while avoiding a formal default. We will be monitoring events for key markers suggesting this scenario is playing out - replacement of Dubai World board members by more technocratic people favored by Abu Dhabi, the transfer of Dubai’s assets, and a general humbling of the indebted emirate in a way that places Abu Dhabi firmly in charge.

However, it would be irresponsible to not also mention what worries us looking forward. Aside from the off-chance that Dubai and Abu Dhabi are unable to converge on a cohesive recovery, what are the chances that Dubai World is just the first of more possible defaults to come? Since the UAE does not release public debt figures and estimates are sketchy at best, there is a chance that another public company could announce an excessive financial burden and a need for bailing out. This applies not just for the UAE but for any of the fast-developing Gulf countries experiencing an asset bubble collapse. With widening credit default spreads throughout the region and even into emerging Asia, any entity dependent on the recent flood of cheap money to roll over its debts could easily find itself out of options. Few would be as singularly vulnerable as Dubai World, but a significant default could set forth a vicious cycle of contraction and collapse that could take a number of victims.

The first sign of things to come could be as early as the first week in December, when Gulf markets re-open from the Eid al-Adha holiday (Dubai World announcing its debt postponement plans just before Eid celebrations was in all likelihood not a coincidence). This will mark the first chance for officials to state positions and make confidence-building claims, with the further interest of calming international markets. Between that time and the December 14 due date for Dubai World’s next debt payment, we expect to see a concrete plan laid out for bailing out the conglomerate and some pressure taken off the credit markets. However, if no settlement can be reached, it would not surprise us if another major entity started talking about restructuring or a debt freeze before year-end – and not necessarily a company in the UAE.

* James Pressler is an associate international economist at The Northern Trust Company, Chicago.

Source: Northern Trust - Daily Global Commentary, November 27, 2009.

[Desert Diner]

Good article. You have to wonder though if Abu Dhabi may negotiate more favorable terms with the creditors before it actuall "bails" Dubai out.

[jethrotull]

UAE Fund & UAE Population

UAE has a estimated population of 1million. A soverign fund of $500billion is equivalent to $500,000 per person.

Most of this soverign fund would be invested in extremely low interest bonds with the likes of Japan or Germany.

What would you reckon is the average debt/person in UAE ?

Can you imagine any of the 7 Emirs thinking of touching this soverign fund to bail out Dubai, possibile, though i would say extremely difficult.

Another thing to bear in mind is the UAE currency that is locked to the $. However this converstion rate is within UAE. I have didly squirt knowledge of currency, however i believe if the spreads on CDS have increased then that would increase the amount of dirhams they would have to pay externally to get $1, surely it would be more than Dhs3.67. The intl currency market would have revalued this exchange rate, which again is heavily dependent on AUHs oil reserves.

If i was living in UAE the first thing i would do is convert my dirhams to dollars.

[grizzled]

A few points, after a couple of days of reading and reflecting.

For many expats who live and work in the UAE this is no surprise. Those who still insist that Dubai is financially sound -- or viable, or sane, or even “real” – must be shopping, driving, working and living whilst wearing glasses so rose-coloured that even the brown Dubai air looks pink. Perhaps it’s a natural human trait to ignore, or at least compartmentalise into some deep recess of the brain, any signs or signals that might force one to question one’s environment (or one’s self) when the place appears so bright and blissful. But that view of Dubai is one-dimensional; under that happy shiny Disney surface lives a nasty troll of a reality. Dubai is George Orwell’s 1984 alive and unwell in 2009.

The “Life is good” mantra that flows from the pages of the Gulf News, through the malls, and bars and golf clubs -- from Deira, along Jumierah all the way to the Marina – is real alright. In the same sense that movie dialogue is real, and Las Vegas is real, and Disneyland is real. That is to say they exist, but only in their own context.

As one sips a nice cold $10 beer at Barasti on Thursday night, laughing and joking with one’s peers, one doesn’t tend to dwell much on the enigmas that might dampen the warm dry desert evening: If all those apartments in the Marina, The Palm, and even The Lakes, are all sold out, why are most of them empty? (Clue: They are indeed “sold out” as soon as they come onto the market. Sold to “Royals” by Emaar or Nakheel, or whomever. Then to someone else. Then maybe to you. But more likely held. It has to do with money. Big money. Money made. Money transferred.)

And that “no swimming” at the beaches thing. Interesting what one might learn if one were inclined to talk (quietly) to one of those sewage truck drivers. You know the ones I mean; lined up for up to 12 hours to dump their “load” at the world-class treatment plant. The plant that can only process 25% of what’s generated. So where does the rest go? No! It can’t be true in this world-class City-of-the-Future.

Which brings us to the word “infrastructure”. In Dubai, companies and governments use that word when they really mean “superstructure.” Dubai has “world-class” buildings and highways and malls and bridges and airports. That is not what is missing. What is missing is the infrastructure to support all the concrete “stuff”. Meaning a truly functional bureaucracy. (Anyone who lives there, or has lived there, can describe the farce that passes for services, rules, regulations, forms, queues, etc.) Most importantly, a few years hence, the world will find out what happens to “world class” structures when real infrastructure is absent: i.e. enforcement of construction standards and regulations by inspectors that really do ensure concrete meets the specifications.

The real Dubai – the one seen through the eyes of the waitresses, cashiers, and bartenders from South East Asia and Africa – is a place of racism, little hope, and a few dirhams a month left over to feed family back home.

The real Dubai – as seen through the eyes of all those born there, but not of Emirati parental origin -- is a place where one is, and forever will be, Stateless. No rights, no citizenship, no place to call home.

The real Dubai – as seen through the eyes of the servant girls and maids from Who-Knows-Where (because they haven’t been hired, but “purchased”) is a place where one lives in either constant fear, or simple resignation.

The real Dubai – as seen through the eyes of the construction worker from Sri Lanka, the cab driver from India, or the hooker from Nigeria – is a place of servitude. A 21st Century receiver and user of slaves. No rights, no respite from 12-hour work days, no advocates. Lies, a huge loan to pay a trafficker for a visa, or even outright kidnapping got you there. And no hope of ever being able to buy your way out. God have mercy on those who get desperate enough to speak out about working or living conditions (as some poor souls have). One first gets physically punished, then sentenced to three months in prison. A real prison; a somewhat mediaeval prison some would even say. Followed by deportation home; to face the “businessman” one stills owes thousands of dollars to, for the visa to the promised land. Many realise suicide is the only real exit from the nightmare.

The real Dubai – as seen through the eyes of Emirati “royals” – is a place of joy. The joy that can only come from absolute power. And absolute control. A place of multi-million dollar aircraft, cars, homes and horses. And servants of course, in all the worst senses of that word.

Lastly, anyone who still has faith in the ability of the world’s financial markets, and financial regulators, to adequately assess risk, and reasonably predict outcomes, hasn’t been paying attention. And that includes any supposed valuation of UAE reserves and sovereign funds.

Suggested Reading: Ozymandias, P.B. Shelley, 1818.

[B. Bonga]

..........it's really amazing how many pilots out there are financial gurus ! I think the Dubai govt and other nations on the brink/in financial meltddown should hire some of the "Economic Boffins" that are dolling out advice on the forum.............

[Capt Roo]

Grizzled - excellent post. Well written and fairly balanced.

I have been a Dubai-sceptic for many years. Passed through many times in the old days, when it was a lovely seaside town. The 40 kilomoetre beach from the Hyatt to the Aluminium factory was always stunning. The offshore building, which was what bankrupted Nakheel, has desecrated a wonderful treasure.

Was tempted by a DEC job at EK a couple of years ago, now am relieved that I didn't take it. The frenetic construction boom and the naked greed shown by every person I came across reminded me of BKK before that crash.

Hope for the sake all my friends in Emirates that it sorts itself out. Surely a merger of sorts between EK and EY is now inevitable? There is no room for two companies with the same product, chasing the same market, in the same country.

[Ndicho Moja]

B. Bonga, what is your take on all this?

[5star]

Well Mr. B., if you are working in Dubai may I recommend you to widen your scope to not only reading the cr@p of GN. Again complete misinformation in today's issue btw...


Well... most of the jockeys here will be no specialists but in a vacuum with no information like here in the UAE, it's only natural that people share their views on forums like this one and Xpatw etc...; If you don't like what you read then why are you visting this site in the first place?

But as 7days states it nicely: Lets see what happens on the DFM tomorrow. It's gone get very ugly...

[ferris]

Whilst all of what grizzled wrote is true- I wouldn't call it balanced.

Moving on...
I see the actual problem is in the way forward. This pending default is not on an interest payment- DW has been unable to refinance that particular bond. It is not the first time, it is just the first time that they have had to tell everybody that AUH might not come to the party. So, as more bonds fall due, the emirate clearly doesn't have the income to repay them (there is no real tax base). How does Dubai intend to proceed in the future? This is what all the ructions are about. Not that a govt owned enterprise can't repay a $3 billion debt (which is small potatoes in the govt debt world).You have four options when a debt falls due:
1. Use income (that you have accumulated) to repay the debt in whole
2. Refinance all or part of the debt
3. Sell asets, either the security for the debt, or other assets to repay the debt in whole
4. Default on the debt (and let bankruptcy run it's course- which will naturally involve asset sales).
*sovereign nations have other options, but Dubai is not a 'nation' in that sense.

It appears that a lot of people think that AUH is going to act as a 'bankruptcy trustee'. Clearly the recent statements indicate this is what is going to happen- but they are warning that they are not going to cover all the paper, and that some entities will fail. Which ones? It seems obvious- and it is going to get very ugly. As to addressing this ongoing problem of lack of income- here is where it gets particularly gruesome. Widening of tax base (income) and trimming outgoings; this is going to be a very painful exercise, and a big cultural change. Weening a govt (and populace) addicted to credit growth.
I can't see any other way forward. Hence the ructions (especially as this process will by revisited every time another bond falls due).

[LLuke]

Here's my opinion.

1. Use income (that you have accumulated) to repay the debt in whole

The income is consumed by the debt burden. If it was that easy they already would have done it. they are digging holes to cover other ones, waiting for better times, that are away for a (too) long time. I guess they could impose income taxes, - in a way fair to those who enjoyed the benefits of Dubai- but the effect could be devastating on the long term and will never be enough, just have a look to the debt/inhabitant ratio.

2. Refinance all or part of the debt

They'll have a hard time refinancing a debt if they don't have the money to pay the interest of the current debt. Conditions for a new loan will never be as good as they were, the problem will just become bigger.

3. Sell asets, either the security for the debt, or other assets to repay the debt in whole

In Dubai, there are no assets. It is a Brit/Arab dream. A paradise in the desert with no purpose. Empty buildings will stay empty. Its value is simply unknown. What is the value of a Boris Becker tower? Foreign assets are likely to be sold when defaulting, although a lot of this will depend on legislation. To what extent is the owner in Dubai liable? If lost money can't be recovered by selling assets, confidence of investors will drop further/ become 0.

4. Default on the debt (and let bankruptcy run it's course- which will naturally involve asset sales).

Then they won't be able to refinance. Nobody, no bank, is ever going to borrow a Dubai owned company a EUR,USD,RMB again if DPW/Nakheel defaults. Unless there is a written bank guarantee from Abu Dhabi or etc.... A short term resolution that will hurt in the near future. Abu Dhabi cannot be counted on. Western investors will demand guarantees for future loans that can't be given.

What -imho- they should do is confess and communicate, contain the situation by making very clear what is available, icw transparent books. I don't think they will be able to provide enough clarity to calm down the markets. If people start dumping Dirhams on monday for EUR/USD/etc it may make things worse. Possibly only EK has transparent bookkeeping for dealing with foreign agencies regarding fair competition. Unfortunately it has the same owner as Nakheel who couldn't / doesn't want to pay its upcoming commitment for Nakheel. Would anyone here borrow mony to a company with a unreliable owner?

[oryxbollocks]

"The Dubai government has proposed a delay of debt repayments after property developer and investment company Dubai World requested a ‘standstill agreement’ with its creditors.

Dubai World owes $59 billion of Dubai’s $80 billion debt and has assets including stakes in MGM Mirage and Standard Chartered Bank. The debt is material enough to the Dubai economy for the government to intervene and propose the delay.

Dubai is one of the seven emirates that make up the United Arab Emirates (UAE) in the Gulf region. Abu Dhabi is the strongest financially as it holds 8% of the world’s oil reserves and they have already begun supporting Dubai by buying $5 billion in bonds yesterday.

Dubai has been running a ‘build it and they will come’ approach to developing their economy. There have been major developments such as a palm tree shaped island and the world’s tallest building proposed (which usually means that a country or company is heading toward a downturn).

As you would expect, the largest creditors of the company are other UAE banks although Bloomberg reported that a number of European banks such as HSBC, Barclays, Lloyds and Royal Bank of Scotland have an unspecified exposure. Shares in these European banks were down heavily overnight.

Credit markets up to this point have assumed that Abu Dhabi would step in if required. However, Abu Dhabi has made it clear that they are not going to bail out Dubai World. We expect that Abu Dhabi will not allow Dubai itself to default as this would destabilise the country politically.

As a further undercurrent, apparently there has been considerable pressure from Abu Dhabi and the US on Dubai to fall in line with their trade polices with Iran (Iran is a major Dubai trading partner). There is no doubt Abu Dhabi will be using the crisis as a lever and will make Dubai absorb considerable pain but we expect at some point they will back Dubai.

We expect that Dubai will enforce sale of Dubai World offshore assets. There will also be pressure on Dubai to sell other assets such as the global portfolio of port operators owned by company DP World.

It will take some weeks for the markets to digest this development and investors will be looking for confirmation that Abu Dhabi will back Dubai." Ord Nexia Financial Services Newsletter 27 Nov.

[ferris]

In Dubai, there are no assets.

That's not true.
I think that AUH signalling support for "selected assets" means legitimate govt infrastructure. Power, water etc. are legitimately "debt entities" (ie. it is usual for a govt to build a power station or a dam etc, funded by debt which is paid off long term by charging for electricity, water etc at an appropriate rate, and you are talking 10, 20 30+ year time frames). Building islands off the coast in an orgy of property speculation- i think these sorts of debts will be allowed to sink. The 'asset' doesn't cover the debt, and the activity itself is questionable on so many levels. The quandary is the intertwined nature of the govt and these enterprises. AUH have clearly signaled they are not going to cover everything. Hence, DW wont be able to borrow money anywhere for a long long time, so AUH will be the only available banker. It's going to be an interesting process. It's going to work out great for AUH. Im certain the sovereign fund managers will be eying various assets with interest.
A heady mix of bargain hunting and politics. Interesting times indeed.

[Jet II]

Originally Posted by LLuke

Nobody, no bank, is ever going to borrow a Dubai owned company a EUR,USD,RMB again if DPW/Nakheel defaults.

What makes you think that Dubai is any different to any other country in the world? - I've lost count of the amount of countries (and nations) around the world that have defaulted on loans but life has gone on.

Mexico, Russia and Argentina all defaulted on sovereign loans (Nakheel is not even sovereign), yet the worldwide banks soon went back to loaning money to them. GM defaulted 6 months ago - are you saying that nobody would ever loan to them again?.

there is an awful lot of hysteria around this weekend - must be Eid or something

[LLuke]

I know your opininion is as valuable as mine and I know that there are assets in DXB, just the value will be difficult to predict. In an empty city the value of a powerplant is zero. Expected future drop in value will be taken into account.

It won't only be DW that can't get loans. Any company from the same owner will be marked contaminated and have major difficulties renewing loans. Anything related to estate in Dubai will have major problems obtaining/renewing a loan. Anything that doesn't represent a clear asset can be used for guaranteeing a loan. Again just my opinion.

[ferris]

What makes you think that Dubai is any different to any other country in the world?

The big difference is that Dubai isn't a country.

the other big difference is that Dubai has already done the rounds of trying to get finance, and the result of that was the recent announcement. It is a statement that already no one is lending them (DW) money (in the quantities required).

LLuke- I agree with your second paragraph, as I have clearly stated. AUH is the only available (large) lender.

[LLuke]

Only thing I just don't get; why did Abu Dhabi let this happen? They did calculate loss/win with all scenarios? Short of liquidity? Historical background?

There will be a lot of uncertainty for everybody in Dubai upcoming weeks.

[Jet II]

Originally Posted by ferris

The big difference is that Dubai isn't a country.

the other big difference is that Dubai has already done the rounds of trying to get finance, and the result of that was the recent announcement. It is a statement that already no one is lending them (DW) money (in the quantities required).

So then they do a GM and liquidate Nakheel - I agree that would have a negative effect on the other property companies but the idea that after that nobody would lend a cent to anyone in Dubai is a bit far-fetched.

As the boss at HSBC said today - “I am confident that the leadership of Dubai and the UAE will overcome any short-term issues they face – which appear to have been somewhat sensationalised”