Tuesday, November 11, 2008

Dubai and Abu Dhabi: Two forces linked by geography, politics, oil, and capital

Interesting happenings in the Persian Gulf this week. Dubai and Abu Dhabi: Two forces linked by geography, politics, oil, and capital. From Fortune Magazine:
"As soaring oil prices enriched the Persian Gulf region in recent years, the United Arab Emirate of Dubai became the embodiment of global exuberance. Now even this boomtown has fallen prey to the credit crisis.

Unlike most of its neighbors, Dubai has almost no oil or gas. So how did it thrive? Well, it had something better than hydrocarbons: a visionary ruler - Sheikh Mohammed bin Rashid al Maktoum. Sheikh Mo, as he is known to his admirers, understood that economic development requires three pillars - capital, competence, and ambition.

He drew capital largely from the fossil fuel wealth of neighboring states. The competence came via imported workers from around the world - don't bother speaking Arabic in Dubai. The cabdrivers are Pakistani and the architects British. The ambition was to make Dubai both a business hub and a billionaires' playground.

It worked. Oil revenues contribute less than 6% of Dubai's gross domestic product. Yet the city has the tallest building, the largest port, and the biggest airport in the world. Homegrown Emirates airline is flourishing. The billionaires have come, along with ordinary tourists - drawn by a relaxed attitude to Islamic norms, absurdly opulent hotels, and man-made islands.

But too-speedy growth always causes some indigestion. In Dubai, the oil money flooding the region stimulated a mighty property boom. Everything went up fast and chaotically: cranes, buildings, prices. Such was the froth that bankers in New York were turning a handsome profit using their bonuses to speculate on Dubai's luxury waterfront condos, buying one week and selling the next.

The oil money was augmented by loans from foreign banks. They considered the abundant oil reserves of Abu Dhabi, a fellow member of the United Arab Emirates, a sort of collateral. The price of oil was rising and Sheikh Mo's vision was mesmerizing. Dubai enterprises - almost all linked to the ruling family - could even afford a multibillion-dollar foreign-acquisition spree, snapping up ports operator Peninsular & Oriental and big stakes in the Nasdaq OMX (NDAQ) stock exchange.

But the credit crunch challenges all three pillars of Dubai's boom. The capital flow has reversed direction. Banks are pulling back from financing Dubai's glossy sand-into-dollars tricks, leaving dunes of debt to deal with: $50 billion, Moody's estimates, more than the emirate's 2006 gross domestic product. Almost half has to be refinanced within the next two years, according to J.P. Morgan Securities.

Dubai is not likely to face financial collapse, thanks to its oil-rich neighbors. The Central Bank of the United Arab Emirates has already made billions available in loans and lines of credit whose purpose was not clearly explained. Now that the price of oil has plunged, Dubai will have to finance more of its own growth.

With credit in short supply, some ambitious projects will fail, and skilled foreign workers could head home. Still, the squeeze might ultimately be good for the emirate's competence if the government focuses its more limited resources on infrastructure - as any visitor can attest, the city's own transport system is woeful - and tries to add some community to a place often described as soulless.

The ambition is still there, but Dubai now has a credible rival - its resource-rich brother an hour up the road. Abu Dhabi has tried to learn from Dubai's excesses. It is pointedly marketing itself to foreign investors as a cultural center and "sustainable" city. Abu Dhabi won't let its overeager sibling really crash and burn - that would cast doubts on its own competence - but it will grab more of the growth for itself."
And from Bloomberg:
"Abu Dhabi won't allow Dubai's state- owned companies default on debt payments as the global banking crisis limits their access to funds, Abu Dhabi Commercial Bank Chief Executive Officer Eirvin Knox said.

``Dubai and Abu Dhabi are interdependent and one can't be isolated from the other,'' said Knox, who presides over Abu Dhabi's second-largest lender by assets. The bank is 65 percent owned by the government through the Abu Dhabi Investment Council.

Dubai may need help from Abu Dhabi and the United Arab Emirates government to finance a surge in borrowing that paid for the world's tallest tower, palm tree-shaped man-made islands and stakes in banks worldwide, Moody's Investors Service said in a report last month.

Abu Dhabi Investment Authority is the world's largest sovereign wealth fund with assets of between $250 billion and 850 billion, according to the International Monetary Fund. The emirate owns more than 90 percent of the U.A.E.'s oil reserves, nearly 8 percent of the world's proven total.

``The leadership of Abu Dhabi recognize the federation and believe in it, and that involves all of the emirates,'' Knox said.

The cost of protecting against a default by Dubai Holding Commercial Operations Group LLC, the emirate ruler's investment company, increased more than fivefold between July and October, according to traders in credit default swaps. The five-year contracts were priced at 900 basis points today, soaring from 241 in July, according to CMA Datavision."
RW: Obviously the markets don't believe that Abu Dhabi will fully support Dubai.

Rebecca Wilder

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