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Storm in a teacup
Published in Al-Ahram Weekly on 03 - 12 - 2009

Fears triggered by the financial hurricane that hit Dubai this week seem to be receding. Magdi Sobhi and Thabet Awwad sift through the debris
Dubai World, Dubai's main investment and holding company, triggered a wave of panic when it announced that it was seeking to defer repayment of up to $59 billion of debt. Stock markets in Europe, Asia and the US plummeted, triggering even sharper falls in Dubai (7.3 per cent) and Abu Dhabi (over 8 per cent).
In Egypt, where the economy is still reeling from the effects of the year-long global recession, the Dubai debt crisis wiped eight per cent off the stock market on Monday, the first day of trading after the Eid El-Adha holiday. Over the next two days, however, the market bounced back, rising by 3.8 per cent on Tuesday and 2.8 percent yesterday.
Simon Kitchen, Head of Research at EFG Hermes, attributes the initial fall to investors in Gulf Cooperation Council (GCC) seeking to raise cash but finding it difficult to sell in the liquidity-short United Arab Emirates (UAE). Other GCC markets were closed on Monday, leaving the Egyptian market to bear the immediate brunt, from which it quickly recovered.
"In the short run we expect no negative impact on the Egyptian economy. However, remittances from expatriate Egyptian workers and the flow of UAE direct investments into Egypt will decline over the next two years," Kitchen said.
The crisis gripping Dubai's largest state- owned firm has many causes. Among the most salient is the lack of transparency that has characterised not only Dubai World but many similar enterprises in the Gulf, where there is often no clear demarcation between the assets and deficits of a company and those of the country, or even the country's rulers. The Dubai experience, in addition, was tacitly dependent upon the financial strength of its sister emirate, oil- rich Abu Dhabi.
The global financial crisis has had a greater impact on Dubai -- an emirate that has been transforming itself into a financial, tourist and entertainment centre in a region famous for its high income levels -- than in many other parts of the world. Even as the global financial crisis forced governments across the industrialised world to announce lavish rescue packages and economic stimulation plans Dubai continued to insist that it was insulated from the worst effects of the crisis, not least because its own financial institutions were supported by the UAE central bank. The confidence, however, proved unjustified.
The central bank had to lend $10 billion to Dubai in February in order to steady its economy. Another ominous sign was the steady drop in real estate prices. In some cases residential properties fell by more than 50 per cent within a single year. Fears that this trend would continue led to the postponement of many ventures, especially major construction projects, which, in turn, led to workers in the construction sector being laid-off. As the great majority of these were foreign residents, their departure brought an exponential rise in the number of residential units on the market. The crisis inevitably spiralled.
In an attempt to allay fears and disperse rumours, Sheikh Mohamed Bin Rashid Al-Maktoum, Dubai's ruler, defended the economy of the United Arab Emirates, saying it had become "stronger and more cohesive".
"We in the Emirates, and in Dubai in particular, are strong and tenacious and we have the determination and strength of will to confront all challenges," said Sheikh Mohamed.
He accused the media of exaggerating Dubai's problems. "It is the fruit-bearing tree that becomes the target of [stone] throwers. What about someone who has seven fruit trees [in reference to the seven emirates that constitute the UAE]? It's normal for us to be facing this campaign and this exaggerated media noise."
Media uproar notwithstanding, the severity of the crisis was a direct result of Dubai World's shock request to defer payment of its debts for an extra six months. Clearly there had been no consultation or coordination with the central authorities in the UAE or with its major creditors. The timing of the announcement, from the company's perspective at least, was clever in that it occurred just before Eid Al-Adha, when local and regional financial markets were closed. That apart, there seems to have been little preparation in either drafting the announcement or in estimating the extent of vulnerability. After issuing the surprise announcement, Dubai World officials then said they were considering restructuring only $26 billion of debt, most of it accrued by its subsidiary, Al-Nakhil. Clearly it would have been wiser to make this known immediately, thus alleviating the shock effect and giving the UAE's financial authorities greater room for manoeuvre.
The crisis was further compounded by an announcement by the government of Dubai that it was not obliged to guarantee the debts, in spite of the fact that Dubai World is a state-owned company. Even if the claim is legally sound, it could easily jeopardise UAE's future development projects by drying up the credit facilities on which it relies. In other words, the short-term solution places long-term interests at risk.
In spite of the mistakes that triggered the excessive panic, the global crisis caused by the Dubai World bankruptcy announcement can still be contained relatively quickly, especially if Dubai World reduces the volume of debt that it wants to reschedule. This appears to be the substance of an agreement already reached between the company and six of its largest creditors, Standard Chartered, HSBC, Lloyds, the Royal Bank of Scotland, Abu Dhabi Commercial Bank and the Dubai National Bank.
It is not so much the volume of debt that needs to be rescheduled that poses a problem for Western financial institutions as the timing, coming just as they had begun to catch their breath after the worst global financial crisis since the depression. At a regional level, however, the risks are greater. Many banks, including Egyptian and Lebanese ones, are also among Dubai World's creditors. In addition, the postponement or cancellation of major construction projects in Dubai and, perhaps, the UAE as a whole, may place additional burdens on the countries that supply labour for such projects, notably Egypt, Syria, Lebanon and Jordan.
The UAE's approval of a federal budget increase of 3.4 per cent over the 2009 budget suggests that the political will exists to resolve Dubai's economic crisis. However, questions of timetabling the implementation of the plans needed to stem the damage and help the Dubai markets recover remain to be settled.
Negotiations between Dubai World and creditor banks have already begun and have been described as positive and constructive in approach to the current and future operational obligations of the consortium. Details of the strategic alternatives and urgent measures to be taken soon are expected to be available within days.
additional reporting by Sherine Nasr

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