Dubai blackout over debt plans to hit markets hard

NICOSIA: A lack of details on how Dubai plans to pay off its 80-billion-dollar debt mountain will hit Gulf stock markets sharply this week when they trade for the first time since news broke of the emirate’s problems, analysts predict.

‘It’s a very serious and severe problem that is likely to shake up the Gulf financial system as a whole. I expect Gulf bourses to dive like the September crash last year’ following Lehman Brothers’ bankruptcy, warned Saudi economist Abdulwahab Abu-Dahesh.

Abu Dhabi, Dubai’s oil-rich neighbour in the United Arab Emirates, is widely expected to use some of its wealth to rescue Dubai, but speculation is rife about what conditions it might impose.

‘Abu Dhabi could quite easily resolve the problems for Dubai if it wanted to but the question is how and at what price,’ said economist Jan Randolph, director of sovereign risk at the IHS Global Insight consultancy.

‘Part of this price now seems to involve the creditors that are effectively being asked to share in the restructuring efforts.’ Dubai World, a state-controlled conglomerate whose businesses include global ports operator DP World and construction giant Nakheel, announced on Wednesday that it was seeking to suspend debt payments for six months while the group is restructured.

The contract most directly affected is the redemption due in December of a 3.5-billion-dollar Islamic bond issued by Nakheel, the company behind Dubai’s iconic Palm Jumeirah tree-shaped artificial island.

The emirate’s borrowings are the equivalent of a full year’s gross domestic product, and Dubai World’s overall debt of 59 billion dollars comprises three-quarters of the emirates’ total debt.

Dubai’s government chose to unveil the shock debt moratorium request immediately before a four-day break for the Muslim holiday of Eid al-Adha, giving regional stock exchanges no chance to react.

European markets partly recovered on Friday after sharp falls a day earlier, but analysts expect the Dubai and Abu Dhabi markets to weaken on Monday when they reopen.

Elsewhere in the Gulf, investors must wait even longer — the Kuwait and Qatar bourses resume trade on Tuesday, Bahrain on Wednesday and Saudi Arabia on December 5.

Oliver Bell of Swiss bank Pictet thinks the Dubai World crisis is a ‘disaster’ for Middle East and North Africa equity markets, and is braced for a big sell-off, he told the UK’s Citywire financial news website.

When news of Dubai World’s problems first broke, he ‘hoped it was a miscommunication,’ but a later statement from Sheikh Ahmed bin Saeed al-Maktoum, head of Dubai’s Supreme Fiscal Committee, confirmed Bell’s worst fears.

‘This was more alarming as it suggests it has been carefully planned and they knew markets would be very concerned. Now we are in a vacuum of no news again,’ he said.

‘If all news stays as it is the UAE market will sell off very sharply when it reopens after Eid,’ Citywire quoted Bell as saying.

On Thursday, Sheikh Ahmed said ‘further information will be made available early next week,’ but Randolph said Dubai World’s announcement has raised many questions that will be hard for Dubai to answer.

‘This was a crisis waiting to happen; all the tell-tale signs were there.

Many creditors assumed that the Dubai government/sovereign would support their

investment and invested companies — this is now in question,’ the analyst said.

Randolph pointed out that Abu Dhabi has the ‘all-important’ oil wells and still generates trade surpluses from its exports.

‘Abu Dhabi is virtually debt-free and has huge assets — including the largest Sovereign Wealth Fund in the World with 400 to 500 billion dollars in assets and at least four other smaller SWFs and finally foreign exchange reserves at about 33 billion dollars,’ he said.

But the economist believes Dubai needs to face up to its difficulties rather than rely completely on help from its richer neighbour.

‘It is necessary that Dubai goes through this restructuring, to sort out the good assets from the bad, that which has an economically viable future and that which does not,’ Randolph said.

The Financial Times said on Saturday: ‘Dubai must sort this mess out. It will not now be able to restore confidence in its solvency without support from Abu Dhabi.’ For its part, Abu Dhabi should give whatever help is needed to bring this episode of incompetence to a close. Abu Dhabi allowed it to be believed that it was backstopping Dubai, so it should make good its promises.

‘This will require a public guarantee of Dubai’s debts — and soon. The reputation of the whole UAE depends upon it.’ The Dubai market’s DFM Index closed on Wednesday at 2,070.89, up more than 40 per cent from the start of the year but still down by two-thirds from its peak of 6,253.10 two years ago.— AFP