A tale of two cities

Abu Dhabi stepped in to bail out Dubai as the financial crisis struck last year. But the emirate now finds itself saddled with higher debt, having born the brunt of its neighbour’s excess, while Dubai is preparing for a mild recovery. Both are likely to seek closer coordination in the future

  • By Digby Lidstone
  • 05 Oct 2009
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Weaving between the airport and the city’s outer limits, Dubai’s $7.6 billion mass-transit rail system is like a vision from Dr Seuss. Under construction since 2005 and 80% over budget, the luxury driverless system made its inaugural journey in early September, curling around half-built skyscrapers and half-empty highways that a year ago were humming with activity.

The contrast is poignant. For months, Dubai has seen little evidence of the crippling traffic that once cost the emirate an estimated $1.4 billion a year, and which first drove plans to build the Gulf’s first urban rail network. Hit hard by the credit crisis, the city has seen many of its wealthier expatriates leave in droves since 2008, many fleeing debts racked up in the boom years. Dubai itself faces an official government debt pile of $80 billion, the result of years of aggressive expansion.

Dubai’s rulers will look back on 2009 as one of the worst in their history. It was the year that a normally tame western press, lulled for years with stories of the emirate’s successes, turned on the city state with a savagery that evidently shocked its rulers. Cars left abandoned in their thousands at Dubai International Airport; skyscrapers left unfinished; investors left penniless by property scams: a steady drip of bad news stories has done much to corrode the public relations machine Dubai had built around itself.

Perhaps the biggest humiliation for Dubai has been having to turn to its neighbour, oil-rich Abu Dhabi, for financial help. A key test of the emirate’s solvency approaches later this year when a $3.5 billion sukuk bond, for property developer Nakheel, is due to mature. Financial analysts say Dubai World, its state-owned parent, is likely to use extra bail-out cash from the United Arab Emirates (UAE) federal government to avoid a default.

Close ties

“I think there have been misgivings in Abu Dhabi for quite some time about the scale of spending and the direction of development in Dubai, and there is probably an element that thinks, ‘I told you so’,” says Simon Williams, regional economist for HSBC, who is based in Dubai.

“But there is also a recognition of how closely tied together the fates of the two emirates are, and there will almost certainly be some effort to ensure that the same pattern does not re-emerge.”

Yet for all its speculative excesses, Dubai has achieved some remarkable feats. The light rail system is a testament to the rapid growth of the coastal trading community into one of Asia’s biggest and most vibrant cities in the past decade. Even when it comes to public transport, Dubai has attempted to excel. Perhaps the most luxurious urban rail system in the world, the network will include VIP cars with fares more than seven times the cost of the cheapest tickets.

The challenge now is to return to a more measured pace of economic growth. “I think there was a temporary sugar rush in Dubai that came from the very rapid expansion of the real-estate sector, and I don’t expect that to reassert itself any time soon,” says Williams.

“But in the process, they built the supporting structures that will enable other sectors of the economy to grow, and those sustainable elements, such as the service industries, haven’t gone away. I still have very strong hopes for how that will play going forward.”

This optimism appears to be shared at a federal level. Sultan Bin Saeed Al Mansouri, the UAE’s minister of economy, has predicted that the national economy will return to positive growth as early as the fourth quarter of 2009. “The UAE has emerged from the most difficult phase of the crisis with minimal losses,” he says.

Al Mansouri highlights several positive indicators, including an increase in consumer confidence, and a rapid drop in inflation, which hovered at 3.4% in the first half of 2009. Once the curse of the residents of Abu Dhabi and Dubai, consumer prices are now the silver lining to the recession. The IMF forecasts inflation, which soared into the high teens in early 2008, to settle to as little as 2% by the end of the year.

Nowhere is this better reflected than in the property sector. Real estate speculation was rife in Dubai in particular a year ago, and that has been reflected in the rapid deflation of the sector. UAE-based investment bank Shuaa Capital predicts that, by the end of the year, house prices in Dubai could drop by up to 60% from their mid-2008 peak. Some residents have seen rents drop by more than a third over the same period.

Reliable economic data is hard to come by for the UAE, though this state of affairs should be remedied with the creation of the National Statistics Centre, which “contributes to supporting the digital economy of the emirates and leverages investors’ trust”, in the words of Al Mansouri.

That said, the common view is that, following a mild contraction this year, economic growth will return in 2010. This prediction is based on two assumptions: sustained high oil prices, which would guarantee the main source of revenue for Abu Dhabi, and the recovery of confidence in industries such as finance and trade, on which the likes of Dubai depend.

According to Sultan Bin Nasser Al Suwaidi, governor of the central bank of the UAE, oil prices “will support expected economic growth next year”, after a rollercoaster period when prices tumbled from their July 2008 peak of $147 per barrel to less than $40, before rebounding. Al Suwaidi forecasts an average of $60–63 per barrel for 2009.  “It is natural for UAE gross domestic product to decline in view of these factors,” he says.

Economists have been queuing up to pick over the entrails of the federal economy and cast their own predictions. A report released by Morgan Stanley in July said that the economy would shrink by 2% in 2009, with a mild recovery predicted for next year.

“The worst may indeed be behind us,” analyst Mohamed Jaber said in a research note. “Given the recent improvement in the global economic momentum, the rise in oil prices over the past few months, and the general stabilization in domestic markets, we believe that as far as the UAE is concerned, we may have reached the bottom of this downturn,” he said.

EFG-Hermes, an investment bank, expects gross domestic product to contract by 4% this year. HSBC is more bullish, putting growth at 0.9%.

The IMF predicts the federal economy will contract by 0.6%, compared with average annual growth of 8.5% during the six-year boom. The IMF predicts non-oil sector growth to fall to just 0.8%, from 8.6% last year – although it expects a positive growth rate of 1.5% in 2010.

While growth may return, will confidence? Its high profile abroad and reliance on foreign expatriate labour meant that Dubai was bound to endure a drubbing following the liquidity crunch. Acutely uncomfortable with such criticism, the UAE has drafted a press law that would ban the publication of stories deemed harmful to the national economy. But in many respects, the damage is already done.

Abu Dhabi has worked hard to shore up confidence in its neighbour, introducing a series of financial packages intended to support Dubai’s debt-laden government and the broader banking community of the UAE. Following five years of high oil prices, Abu Dhabi has been able to build up a fiscal surplus of $500 billion. When Dubai faltered, its neighbour was on hand to help.

Of the $80 billion of outstanding debt declared by Dubai, some $7 billion is due for refinancing by the end of 2010, and a further $25 billion the following year. The government is now entering the second phase of a $20 billion bonds programme that will help it provide cash to companies struggling to refinance.

Abu Dhabi was there to help with the first part of the programme. In February, Dubai sold $10 billion bonds to the central bank of the UAE, covering immediate liabilities, and a further $10 billion issue is expected by the end of the year. Whether Dubai turns to its neighbour or to the open market has yet to be decided. But Abu Dhabi’s own experience with bond issues bodes well for Dubai, should it choose the latter option.

Abu Dhabi in April offered $3 billion of sovereign bonds, in two separate tranches, as part of a $10 billion programme of debt issuance. A roadshow conducted in the US and Europe clearly had the intended effect, as the sale reportedly received bids worth more than double the offered amount.

Financial markets have evidently been encouraged by Dubai’s determination to pick up the pieces. Dubai World has been gauging interest from banks to restructure up to $12 billion of its loans, while determining its approach to Nakheel’s sukuk. And in August it emerged that Dubai Holding, the investment group owned by Dubai’s ruler Sheikh Mohammed bin Rashid al-Maktoum, was also intending to restructure its operations, to create four divisions covering property, business parks, hospitality and investments.

“The realities of the global economic climate have made it necessary for us to look at our portfolio in a different way,” says Ahmad Bin Byat, chief executive.

Dubai Holding has since moved to merge its property interests – which include DPG, Tatweer and Sama Dubai – with Emaar, the Dubai-based property group, as well as to consolidate its two investment arms, Dubai International Capital and Dubai Group.

Dubai government bonds have climbed steadily since the summer, suggesting the moves have been well received. To some extent, the emirate is also benefiting from a surge of interest in emerging market assets worldwide, amid tentative signs of a global economic recovery.

Focus on substance

So Dubai will likely emerge from the recession a leaner animal, but this will be to its advantage, says Williams. “The quality and substance of infrastructure here is excellent, and you don’t see that quality anywhere else in the region. As time passes, people will reassess their view of Dubai and recognize those things that it has got right, and focus on the substance of the economy, which is far more than tall towers and palm-shaped islands.”

The consequences are less positive for Abu Dhabi, which has born the brunt of its neighbour’s excesses. Fitch Ratings reaffirmed the emirate’s credit rating in early September, but said its holding of Dubai debt could represent a potential liability. Fitch also noted that while Dubai is busy reducing its debt, Abu Dhabi has been borrowing more. State-controlled companies have borrowed more than $18 billion so far this year.

“I think the relationship has changed,” says Williams. “On both sides of the divide there seems to be a recognition of the benefits of a UAE federation, but also of its weaknesses. As the economy recovers, you will see a return of competition, and Abu Dhabi and Dubai will continue to plough their own furrows, but I suspect you will see more central planning and coordination than before.”

  • By Digby Lidstone
  • 05 Oct 2009

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 315,565.94 1183 8.89%
2 JPMorgan 288,650.70 1316 8.13%
3 Bank of America Merrill Lynch 284,218.69 988 8.01%
4 Goldman Sachs 215,758.12 710 6.08%
5 Barclays 207,555.74 805 5.85%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 32,400.29 147 6.76%
2 Deutsche Bank 32,042.83 103 6.69%
3 Bank of America Merrill Lynch 28,820.43 84 6.02%
4 BNP Paribas 25,608.74 143 5.35%
5 Credit Agricole CIB 22,617.86 130 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 18,067.92 70 9.12%
2 Morgan Stanley 15,215.44 76 7.68%
3 UBS 14,195.29 55 7.17%
4 Citi 14,014.57 86 7.07%
5 Goldman Sachs 12,113.98 67 6.11%