This content is from: Portfolio

Digging Out Dubai

Dubai clearly cannot resolve the issue of short-term maturing debt on its own.

The awkwardness with which Dubai is handling the Dubai World crisis is clear: a botched announcement on a “standstill” on debt, a silent period owing to the holidays, then clarifications that were merely off-the-cuff statements. Only when Dubai World itself issued a statement that $26 billion of its property subsidiaries’ debt will need to be restructured did it become obvious what was at stake. Lenders assumed there was a firm guarantee from the Dubai government — a naive assumption, as it turns out.

Concerns about Dubai’s debt have been in the news since March, with speculation that its wealthier neighbor, Abu Dhabi, was considering an assets-for-debt swap. Eventually, when support did come, in the form of a $20 billion bond offering through the UAE central bank, it was apparent that an asset sale to Abu Dhabi was not in the cards.

Dubai clearly cannot resolve the issue of short-term maturing debt on its own, and it either will need the lenders to be more understanding about extending maturities and providing new debt or will have to lean more heavily on Abu Dhabi for financial support. Whereas regional banks may be understanding, foreign banks will be harder to convince.

Support from Abu Dhabi, though not linked to any asset purchases, will aim to highlight acceptance of a federal approach by all parties. Dubai will have to tone down its branding of Dubai, and perhaps work toward a more centralized approach on policy matters. Abu Dhabi has a quieter style in dealing with these issues and will likely want lenders and Dubai to feel some of the pain of their decisions. Its support will be forthcoming merely because the UAE cannot afford a default, but Abu Dhabi will want all parties to realize that its checkbook does not offer carte blanche for lenders.

That said, the crisis has created one enormous benefit: The UAE is beginning to act and feel more like a single nation than a collection of independent-­minded city states.

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