Sunday, 29 November 2009

Dubai Standstill Rocks the World

29th November 2009

The Malta Independent on Sunday

Alfred Mifsud

Late last Wednesday, the European financial markets had wrapped up for the day as they normally do every weekday evening. The US markets were still open, but with Thanksgiving the next day, and many operators bridging the holiday to the weekend, the market was practically dead.

In the capital markets of the Middle East, operators had also wrapped up for the start of the weeklong holiday of Eid-al-Adha. The mood was bullish, because just that morning, Dubai has announced it had raised finance amounting to $5 billion from two Abu Dhabi banks, in addition to the $10 billion raised in February from the Federal Central Bank of the UAE, which is dominated by Abu Dhabi.

The Emirate of Dubai was considered the most exposed to the international financial crisis, as it was highly leveraged (over-borrowed. in laymen’s terms) and the credit crunch put in doubt its ability to meet its obligations, due to the difficulty of rolling-over its debts in an illiquid market. On its own standing, Dubai would probably never have been able to raise the funding in the first place but it was not standing on its own. It is the second largest of seven Emirates which together form the United Arab Emirates (UAE) – a political federation of autonomous states that operate their fiscal policies independently.

In reality, Dubai is a poor nephew with a rich uncle in the form of Abu Dhabi, the extremely resourceful and cash-rich main Emirate of the UAE. The markets always assumed that, over-borrowed as it was, Dubai remained a fair risk, as the rich uncle would always come to its rescue. Rich in oil and conservative in outlook, Abu Dhabi viewed Dubai’s penchant for frolic and folly with distaste and occasional envy. Nothing else explains how the two Emirates compete to the point of folly in operating separate airlines (Emirates and Etihad) rather than joining forces to gain economies of scale. Nothing else explains how Dubai could afford the tallest building in the world, oddly shaped hotels in the middle of the harbour, luxury residential palm-shaped projects on land reclaimed from the sea, golf courses in the middle of the desert, ice rinks in scorching heat and investments in relics like the QE II cruise liner and the Circle de Soleil troupe.

Then, late on Wednesday, when turkeys were being stuffed for roasting in the US and Middle East financial operators had already left for an extended holiday, Dubai issued a statement that rocked the financial world. They told the world that uncle Abu Dhabi was tired of bailing them out and consequently they were forced to request the creditors of one of the main holding companies, Dubai World, to standstill (postpone repayments falling due) for the next six months until they could persuade their rich uncle to cough up the money in order to keep the nephew on the straight and narrow without bringing the whole family into disrepute.

With liquidity from the US market out of the equation due to Thanksgiving, and markets in the Middle East shut for Eid-al-Adha, European markets had a very rough Thursday and shed three per cent in one of the worst days since the bottom of the financial crisis was reached last March.

It still has to be seen whether this is a localised problem, which could be sorted out when the rich uncle thinks he has spanked the naughty nephew enough to teach him a lesson and has obtained enough financial concession (maybe ownership of Emirates could be part of the equation?) to make a bail-out worthwhile, or whether this could lead to contagion that spreads to other over-borrowed creditors, including EU members Latvia and Hungary and eurozone member Greece.

Is this the precursor of similar problems, such as the sovereign debt of Greece – where doubts are creeping in over whether it can keep its exploding fiscal deficit under control? The financial market has already begun demanding much wider spreads in return for continuing to finance Greece’s external borrowing. Being a member of the eurozone, Greece’s uncle would be Germany who, in order to keep the euro monetary system together, will have to come to the rescue of the naughty Greek nephew. What price Greece would have to pay to procure such a bail out? Would Germany insist on taking direct control of Greece’s fiscal policies? Would this be done bilaterally, through the European Central Bank or may be through a sponsored rescue by the IMF?

We are not disinterested bystanders in all of this. We have an interest in the sustainability of the euro monetary system, which is now our own currency. We have an interest in the financial sustainability of Dubai.

In its spending spree when credit was easy, Dubai – through one of its state-sponsored enterprises – bought out our own Maltacom and signed an agreement for the development of SmartCity. Maltacom’s purchase is fully funded and the rebranded organisation GO is, in fact, participating in and helping to finance other Dubai ventures in Greece. So it should not be at risk.

SmartCity, however, is not yet funded. The feasibility of procuring its funding and the viability of the project in a changed economic scenario are, at best, in doubt. Although our government has, in the past, put great reliance on the SmartCity project to take up the construction slack created by the cooling down of the property market and the termination of other major infrastructure projects, suddenly there is complete silence. Not even a paragraph in the last budget speech was dedicated to up-dating us on the state of SmartCity.

Executive turnover at the highest level of the project team, and snail’s pace progress of the development on the ground, forces any reasonable observer to conclude that the project is at best being slowed down and at worst being considered for outright postponement.

We have to be realists. If Dubai has problems in servicing its existing debts, is it reasonable to expect that it can finance new investment in an overseas country that is not yet funded?

Government has to defend the country’s long-term interests and seek clarity from the promoters about their intentions for the SmartCity project. In the end, this project was considered as a major chip in the future growth of our economy and we cannot continue to lead by hope: hope does not create jobs.

These developments come with a strong moral. Government should kick the habit of celebrating new projects at the point of their announcement. We have just had a similar experience where, in the Prime Minister’s reply to the Leader of the Opposition’s criticism of the budget, he simply washed away all disparagement on the basis that the investment in an aviation maintenance project – ‘coincidentally’ announced on that every same day – showed that the country was still capable of attracting high value-added international foreign direct investment and, by inference, export-led economic growth will soon return.

Let’s rejoice that such investment is being planned. Let’s keep hope that that SmartCity can be realised by the Dubai promoters, or other investors who may be interested in taking over. But let’s build our economic plans with our feet firmly on the ground and only celebrate actual execution and commercial operational success, as is the case with Lufthansa Technik. Premature celebrations purely to score political points have a tendency of biting back when reality hits home.


No comments:

Post a Comment