Thursday, February 26, 2009

One emirate, to its chagrin, depends on its neighbor for credibility

By Henry Meyer, Bloomberg News [24/02/2009]

DUBAI: A $10 billion bailout from its neighbor, Abu Dhabi, threatens to cost Dubai its autonomy and the free-wheeling economic system that helped establish it as the Middle East's main business hub.

Abu Dhabi, one of seven sheikdoms in the United Arab Emirates along with Dubai, pumps more than 90 percent of the U.A.E.'s oil. Abu Dhabi has long objected to its smaller neighbor's debt-fueled expansion.

Dubai accumulated $80 billion in debt to build real estate projects, including the world's tallest building, while Abu Dhabi amassed one of the world's largest sovereign wealth funds.

"Abu Dhabi is lending its credibility to Dubai," said Eckart Woertz, an economist at the Gulf Research Center, an independent research institute in Dubai. "Most likely this comes with strings attached, with a price tag. Before, Dubai was dependent on international banks. Now it's dependent on Abu Dhabi."

The bailout, in the form of the U.A.E. central bank's $10 billion purchase of Dubai bonds on Sunday, led the sharpest rally in Dubai shares in three months on Monday, though the market gave back some of those gains Tuesday. Abu Dhabi is the richest of the U.A.E.'s constituent emirates and effectively controls the central bank.

Dubai's real estate boom, fueled by low interest rates, oil revenue and investment from international companies seeking to tap Gulf wealth, came to a halt last year as the price of Dubai oil fell to about $37 a barrel at year-end from about $90 a year earlier. Moody's Investors Service said on Feb. 12 that it might downgrade banks and government-owned companies in Dubai if Abu Dhabi did not lend its support.

Real estate prices in Dubai have fallen 25 percent from their September peak, Morgan Stanley said in a report Feb. 2. The decline came as the price of oil has plummeted and scarce global credit led investors to dispose of assets in emerging markets. The emirate may have to refinance $15 billion this year in maturing loans and bonds, according to Moody's.

The government-owned real estate developer Nakheel PJSC has had to revise plans for its Waterfront project, which was expected to house 1.5 million people. The company has enough financing for 700 villas, compared with the 10,000 originally planned, according to Sultan Ahmed bin Sulayem, chairman of Dubai World, which owns Nakheel.

Dubai built its role as a regional hub by creating special zones for financial services and media, where many local restrictions did not apply, and building dozens of luxury hotels, the biggest port in the Middle East and the world's largest man-made islands. It also was host to leading tennis tournaments and organized high-profile golfing and rugby championships as well as the Dubai World Cup, the world's richest horse race.

"We'll never see the city getting so far ahead of itself" again, said Christopher Davidson, author of the 2008 book "Dubai: The Vulnerability of Success."

"There will be a lot more discreet control over what Dubai can do," he said. "Abu Dhabi now has considerable leverage."

Abu Dhabi, whose sovereign wealth fund had $328 billion in assets at the end of 2008, according to a study by economists at the Council on Foreign Relations in New York, may now move to buy stakes in Dubai companies controlled by the ruler Sheik Mohammed bin Rashid al-Maktoum, Woertz said. Among them: Emirates, the biggest Arab airline, Dubai's international airport and the Jebel Ali port.

"Abu Dhabi has looked toward Dubai with a mixture of envy and contempt, a bit like old money usually thinks about nouveaux riches and their daredevil business approaches," Woertz said.