Dubai's economy: no oasisNovember 25, 2009
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www.Soros.org/Soros-LecturesUntil last month, a billboard at one of Dubai's busiest roundabouts featured one photo, of Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum. The new billboard says ``Long live our Emirates union'' and also shows United Arab Emirates President Sheikh Khalifa Bin Zayed Al Nahyan.
Dubai's financial woes have tamed the once-independent emirate and forced it closer to Abu Dhabi, which holds 90 per cent of the U.A.E.'s oil. Sheikh Mohammed last week demoted three business aides and fired one. All had been pivotal in the debt-fueled expansion of past years, requiring Dubai's rescue with a $US10-billion loan from the U.A.E. central bank.
The global financial crisis that swept into Dubai last year not only put an end to a construction boom that saddled it with $US80 billion ($87 billion) of debt. It may also mark a turning point in the U.A.E.'s history toward a stronger central state, which investors say will make Dubai a more attractive destination by bolstering its creditworthiness.
``Abu Dhabi is pumping 2.5 million barrels a day of oil, of course you want it and Dubai to be working together,'' said Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd., which oversees more than $US100 billion globally. ``They don't need to compete against each other,'' he said in a phone interview.
Mostaque said he is positive on Arabtec Holding PJSC, Drake & Scull International PJSC and Depa Ltd., all Dubai-based construction companies expanding into Abu Dhabi.
Central bank
Sheikh Mohammed in February turned to Abu Dhabi, holder of the world's sixth-largest crude reserves, for a $US10 billion bailout. The central bank, which has its headquarters in the country's capital of Abu Dhabi, bought the entire bond issue.
Dubai is seeking an extra injection of $US10 billion by the end of the year, Sheikh Ahmed bin Saeed Al-Maktoum, chairman of the emirate's Supreme Fiscal Committee, said Nov. 16. The bond would get ``majority government'' participation, Mohammed Ali Alabbar, chairman of Emaar Properties PJSC and a member of the Dubai Executive Council, said Oct. 9.
The renewed financial lifeline comes as Dubai and its state-owned companies have to repay $US15.8 billion of bonds and loans maturing this year, $US9.2 billion in 2010, $US19.8 billion in 2011 and $US17.3 billion the following year, according to a Deutsche Bank AG report in August.
Islamic bonds
The sheikhdom raised $US1.93 billion last month from the biggest sale of Islamic bonds in the Gulf Arab region this year. It was made possible by investors' confidence that Abu Dhabi stands behind Dubai, said Tristan Cooper, a Dubai-based Middle East sovereign analyst at Moody's Investors Service.
``Assumed backing from Abu Dhabi and closer ties between the emirates bolsters investor confidence generally in Dubai and helps to attract foreign investment,'' Cooper said by e-mail. Dubai's $US80 billion debts are #####alent to 100 per cent of the city-state's 2008 gross domestic product and nine times its 2008 revenue, according to Moody's.
The cost of protecting Dubai bonds from default traded at 317 basis points today from a peak of 977 in February, five-year credit-default swap prices show. The contracts get cheaper as perceptions of credit quality improve.
Since the start of the year, when Sheikh Mohammed launched a new Web site dedicated to his activities as prime minister of the U.A.E., he has been seen increasingly in public in that role. A front-page story on the Dubai-based Gulf News on Nov. 8 showed the Dubai ruler touring a new desert resort in Abu Dhabi's Western Region with Sheikh Khalifa, who in addition to being president also leads Abu Dhabi.
Separate army
The air show in Dubai this year was inaugurated by the Crown Prince of Abu Dhabi and Deputy Supreme Commander of the U.A.E. Armed Forces Sheikh Mohammed Bin Zayed Al Nahyan, brother of the president, alongside Sheikh Mohammed.
Dubai split from Abu Dhabi in 1833. It kept its independence thanks to the U.K., which pursued a policy of divide-and-rule in the Gulf emirates, according to the 2008 book ``Dubai: The Vulnerability of Success,'' by historian Christopher Davidson.
Though Dubai grudgingly integrated with Abu Dhabi in 1971 in a federation of seven emirates, it maintained a separate army until 1996, the book said.
Billboards of the two sheikhdoms' rulers are going up in Dubai ahead of the Dec. 2 celebration of the 38th year since the U.A.E. was founded.
Sheikh Mohammed, 60, who became ruler of Dubai in 2006, accelerated his brother's policy of diversifying the economy from dwindling oil supplies by transforming Dubai into a tourism and finance hub.
Tower and islands
The emirate is building the world's tallest tower and largest man-made islands in the shape of palm trees. This year it had to shelve plans to construct a new waterfront development the size of Hong Kong Island and ``Dubailand,'' a leisure park that would have been three times the size of Manhattan.
Home prices are down more than 50 per cent from their peak in the third quarter of 2008, Deutsche Bank AG said on Nov. 5. Prices may drop as much as 30 per cent more, UBS AG said Nov. 18.
``The whole strategy of diversification was a consequence of oil running out and wanting to keep their independence,'' said Eckart Woertz, an economist at the Gulf Research Center in Dubai. ``Now this diversification model is in dire straits and Abu Dhabi is the one that can help Dubai out.''
Dubai oil production began in the 1960s, reached a peak of about 350,000 barrels a day in the late 1980s and has now declined to about 80,000 barrels a day, said Dalton Garis, a professor at the Petroleum Institute, Abu Dhabi. The U.A.E. government says Dubai oil reserves will run out within 20 years.
`Shut up'
On Nov. 9, Sheikh Mohammed said people who speculated about relations between Dubai and Abu Dhabi should ``shut up,'' at an investors' conference in Dubai organized by Bank of America Merrill Lynch.
The ruling lines of both emirates are ``the same family, not only that but the same tribe, the Bani Yas tribe,'' he said. They ``ruled many many tribes in the Arabian Peninsula for hundreds and hundreds of years.''
Eleven days later, the sheikh removed the governor of the Dubai International Financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into a Middle East finance hub. This came 24 hours after he dropped Mohammad al-Gergawi, Sultan Ahmed Bin Sulayem and Alabbar from the board of the Investment Corporation of Dubai, the emirate's main holding company.
The centralization of the U.A.E. ``could be the price Dubai has to pay for the Abu Dhabi bailout,'' said Woertz. ``This might cause some bruised egos here and there.''
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