Are the wheels coming off Dubai? Momentum in the spendthrift emirate certainly looks to be grinding to a halt. Last week, Dubai received a US$15 billion bailout from Abu Dhabi, its cash-rich big sister. At least that’s how the lending facility set up by the UAE central bank is being privately interpreted. It’s just one of a number of warning signs.
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Suddenly, Dubai Catches a Cold
4 October 2008
Are the wheels coming off Dubai? Momentum in the spendthrift emirate certainly looks to be grinding to a halt. Last week, Dubai received a US$15 billion bailout from Abu Dhabi, its cash-rich big sister. At least that’s how the lending facility set up by the UAE central bank is being privately interpreted. It’s just one of a number of warning signs.
A year ago, Dubai was running at full-speed. Everything was going up, fast - cranes, new buildings, property prices. Such was the froth, bankers in London were using their bonuses to speculate on Dubai’s luxury water front condos, buying one week and selling the next. But now that’s an unprofitable game.
Dubai has caught the credit cold. In just three months, the spread on Dubai’s credit default swaps have doubled to 300 basis points - to almost three times that of Abu Dhabi.
It’s no secret Dubai is resource poor, with just 6 per cent of its GDP coming from oil and gas. Yet, while none of the UAE states have official credit ratings, global banks have until now freely granted credit to Dubai as if it had the same black-gold backstop as Abu Dhabi.
In the downturn, commodity-scarce Dubai is being forced to face financial reality. Lenders no longer assume its state-backed entities are so credit worthy. Property developer Nakheel is understood to have suddenly found that refinancing its huge US$3.5 billion debt mountain will be more expensive. Elsewhere, construction of the world’s largest airport is thought to be behind schedule, and other large island projects postponed.
Glossy international investments are also being rethought. Dubai Financial Group isn’t expected to help Marfin, the Greek investment group in which it owns a 17 per cent stake, to raise the five billion euros (S$10 billion) it needs.
Similarly, Dubai International Capital looks to have taken its eye off Liverpool Football Club. Instead, capital tied up in existing assets will be redeployed to strengthen balance sheets where it’s most needed.
No one is yet suggesting Dubai will collapse under its debt strain. Despite sibling rivalry, it’s understood Abu Dhabi would always act to avert a crisis. But last week’s lending facility serves as a clear whisper down the corridor telling Dubai to slam on the brakes.
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