The ticking time bomb in Dubai finally exploded late last week.
On the eve of their most important Muslim holiday, which happened to coincide with the eve of Thanksgiving in the west, Dubai authorities made two statements spaced a few hours apart.
The first– that the heavily indebted, government-owned flagship holding company Dubai World had successfully raised a few billion dollars. Investors collectively exhaled, temporarily relieved that the company would be able to make good on its colossal debt payments.
The second statement came only hours later: Dubai World announced that it was asking creditors for a standstill on its outstanding debt… in other words, everything freezes– no more payments.
It’s a real life example of the adage, “If you owe the bank $100K and can’t pay, you have a problem. If you owe the bank $100 million and can’t pay, the bank has a problem.”
In Dubai’s case it’s around $80 billion.
Default and debt restructuring occur all the time, especially in the worst downturn of modern history. The part that stings investors about Dubai, though, is the utter lack of transparency and potential subterfuge. For months, the emirate has been reassuring investors that it would be able to raise money and make its debt payments.
Even Dubai’s ruler, Sheikh Mohammed gave worried investors the “talk to the hand” earlier this month, insisting that Dubai World (essentially his personal holding company) would be well capitalized and supported by Abu Dhabi, its rich neighbor.
Just a few weeks later, after months of tap-dancing, Dubai finally pulled back the curtain and confirmed investors’ fears– it had run out of cash. The nonchalant, innocuous way in which it was handled, however, will continue to infuriate investors for a very long time.
The reality is that lack of transparency defines the business culture in the Gulf region. I’ve been doing business and traveling there since 2001, and I can say unequivocally that this sort of behavior is typical.
In an investment deal, for example, you never actually know where you stand until the moment they write the check. If they’re not interested, they will string you along for months and never actually say “no.” In some parts of the Gulf, outright lying is considered to be the honorable thing to do.
Thus, it’s not surprising that while Dubai authorities were reassuring investors, local banks were busy raising money, preparing for what they knew was a certain outcome.
First Gulf Bank, for example, closed a $500 million issue for “general corporate purposes” less than a week before the Dubai news broke. Moreover, since September there has been a flurry of fund raising by banks and governments in the region, including the government of Qatar’s $7 billion debt issue this month.
Coincidence? Doubtful. Regional banks and governments likely seized the opportunity to raise cheap money while it was still available, probably with advanced knowledge of Dubai’s timeline. This is simply the way it’s done in the Gulf… and while it seems obtuse, there are some important things to keep in mind:
First, Abu Dhabi Islamic banking institutions are going to be just fine. The vast majority of Dubai exposure is with foreign banks, namely HSBC and RBS. Regardless, UAE’s central bank has indicated that it will support any bank that needs help, including the foreign banks.
Remember that the direct scope of the problem is ‘only’ $80 billion. This is equivalent to about a 2% drop in the Dow.
Abu Dhabi has already sustained losses of $125 billion so far in the financial crisis thanks to bad investments in western financial institutions like Citi. Yet with roughly $1 trillion in reserves and new oil revenue flowing in on a daily basis, this wealthy emirate is hardly breaking a sweat.
Dubai’s ruling Sheikh Mohammed, however, is going to have to dig deep to navigate his emirate through the downturn.
Foreign investors will certainly adopt a ‘fool me twice, shame on me’ attitude towards loaning any more money to the Sheikh. And with its credibility and creditworthiness in shambles, Dubai will likely cede its position as the region’s financial hub to Doha and Abu Dhabi.
I wrote about this just last month on October 27th:
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In a crunch, many of the companies under direct or indirect control of the ruling family had to go to the main office with hat in hand looking for funds. . . Dubai has become cash poor and its bills are piling up. . .
The price they are paying is great, but between this successful bond sale and the backing of big brother Abu Dhabi, Dubai’s cash flow issues should be solved for the next five years. . .
In the end, though, I think financial constraints prevent Dubai from winning– bruised and battered, it won’t make the final cut… always a contender, never again a champion.
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Now this outcome is even more certain. Dubai will recover financially with Abu Dhabi’s help, but investors won’t be able to wash out the sour taste. Doha and Abu Dhabi will be there, cash in the bank, welcoming them with open arms.
** Lastly, a quick administrative reminder: if you signed up for the Panama Black Paper pre-notification, you will be receiving an email tomorrow with a purchase link.
