Friday, December 4, 2009
Officials of the debt-laden Dubai World conglomerate are preparing to meet creditors owed some $26 billion. Dubai roiled credit markets when it announced last week that the government has no responsibility for the debts of the quasi-governmental holding company. That statement shattered the assumptions of many creditors and may redefine the nature of lending in the Middle East.
On a nondescript bit of windblown desert along the Dubai-Abu Dhabi highway, Dubai World's real estate arm, Nakheel, promised to build the Dubai Waterfront, a new city big enough for 1.5 million people.
The development would effectively double Dubai's population — if it is ever built, which people in Dubai are beginning to doubt. If it's not built, analysts say, it will be one more multibillion-dollar albatross around Dubai World's neck.
On Dec. 2, the United Arab Emirates, a federation of seven small sheikdoms including Dubai, celebrated its creation a scant 38 years ago.
From a sleepy Persian Gulf backwater dependent on pearl diving, Dubai exploded onto the world stage with an orgy of borrowing to finance projects that grew more outlandish with each passing year. The debt piled up with astonishing ease, in part because lenders assumed that the government-owned development companies like Dubai World could rely on public money, in particular neighboring Abu Dhabi's oil wealth, to meet their obligations.
So when Dubai's finance minister said the government had no obligation to pay Dubai World's debts, international markets reacted as if they'd been sucker-punched.
Andrew Critchlow, Middle East managing editor of Dow Jones newswires, told Al-Jazeera's English-language channel that creditors weren't impressed by Dubai World's claim that it simply wanted to delay a few payments.
"This is a default in everything but name. This has surprised the entire business community, and no one more than international banks," Critchlow said.
Creditors holding some of Dubai World's debt have banded together and hired a law firm to represent them. But experts say their legal position in Dubai is weak.
Analyst Raj Madha at EFG-Hermes says the traditional responses most creditors have to a default are not attractive options given the bankruptcy laws in the country.
"It takes a long time to have an insolvency over here, roughly around three years. The level of uncertainty for that length of time would be horrendous for really both sides. It's far more likely that they're all going to have to sit down at some point and negotiate some sort of settlement around a table," Madha says.
So far, the talks are focusing largely on Dubai World's real estate development companies, Nakheel and Limitless.
But what about other projects and other quasi-governmental firms, such as Dubai Holding? There are fears that the UAE is taking a piecemeal approach that will yield more unpleasant surprises down the road.
In one sense, the banks that rushed to lend money to Dubai World have only themselves to blame, since the debt agreements clearly stated that there was no government obligation to step in. Most creditors assumed that the government would do just about anything to avoid a default because of the loss of confidence and damage to Dubai's image that would ensue.
But Colin Foreman, Gulf bureau chief of the economic news service MEED, says it is becoming clear that this isn't a case of Dubai's being unwilling to meet its obligation. The problem, he says, is that Dubai is unable to meet them, and that's what investors are worried about.
"This is particularly interesting if you start looking at the broader region," he says.
Foreman says a good deal of the Middle East economy has been driven by similar quasi-governmental companies enjoying favorable lending rates. He says these firms are building some of the most ambitious projects in the region.
"[They are] fantastic projects, but they've been built with money that's been borrowed from people that thought they were lending money to an organization that had government support. As we go forward, undoubtedly people will start questioning whether there's government support for other organizations, in places like Abu Dhabi and Qatar," Foreman says.
Meanwhile, scrutiny of Dubai's government-backed companies is only intensifying. The ratings agency Standard and Poor's says it has reduced the ratings of six such companies — including relatively healthy firms like port operator DP World — to junk-bond status.