UAE moves to counter Dubai fallout but markets wary
Sun Nov 29, 2009 1:55pm EST
By Martin Dokoupil and Enjy Kiwan
DUBAI (Reuters) - The United Arab Emirates offered banks emergency support on Sunday, the first steps to ease fears that a looming debt default by two of Dubai's flagship firms could derail the global economic recovery.
But the move to inject liquidity into Dubai's banks by the central bank of the Gulf Arab state, together with promises by neighboring city-state Abu Dhabi to provide selective support to Dubai companies was seen as by analysts as the bare minimum.
Dubai markets, which are set to open on Monday morning after a four-day holiday, are expected to fall by the maximum daily limit of 10 percent as banks, property and construction firms face investor ire over moves to restructure the Dubai economy.
The action of the UAE central bank to allay concerns by setting up an emergency liquidity facility was viewed as a necessary, but minimal policy response.
"This is the absolute minimum they could have done and suggests they won't be making another announcement before tomorrow morning, which is a little disappointing," said Raj Madha, banking analyst at EFG-Hermes.
Regional investors want any sort of guidance from the central bank or government ahead of the market open as rumors about the scope and origin of the crisis run rampant.
The supreme fiscal committee of Dubai met on Sunday evening to hammer out potential policy responses. But in the absence of concrete policy statements, doubt is likely to prevail.
The crisis began on November 25 when Dubai, part of the United Arab Emirates federation, asked to delay payment on billions of dollars of debt issued by conglomerate Dubai World and its main property subsidiary Nakheel, developer of three palm shaped islands that has attracted celebrities and the super-rich.
Dubai World had $59 billion of liabilities as of August, most of Dubai's total debt of $80 billion. International banks' exposure related to Dubai World could reach $12 billion in syndicated and bilateral loans, banking sources told Thomson Reuters LPC.
Investors are especially keen to discover whether the six-month "standstill" on debt repayments to Dubai World and Nakheel will be voluntary or involuntary. If creditors are not given a choice, the restructuring will be viewed as a default.
SLOW RESPONSE SO FAR
Abu Dhabi, the wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbor Dubai, a senior official said on Saturday.
"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the adjoining emirate of Abu Dhabi told Reuters by phone.
Selective assistance for companies in "Dubai Inc.," a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors. For years, many assumed that the conservative Abu Dhabi provided a safety net for its racier neighbor, which is known for its flashy nightlife and is home to the world's tallest building.
While around the world, politicians, central bank officials and corporate executives have lined up to express concern at the risks of the Dubai debt crisis hitting their own economies, leaders in the UAE have remained quiet or minimized any threats.
Local media, mostly owned or controlled by government-related entities or vested interests, initially ignored the gravity of the crisis and have now taken to criticizing foreign media for blowing events out of proportion.
A headline from Arabic-language daily Al-bayan on Sunday read: "Dubai is exemplary for investment destinations." English-language Gulf News said: "Global outcry over Dubai World restructuring is exaggerated."
Dubai's depressed property market may see further price declines of around 20 percent to 30 percent and increased concern over the availability of finance after the emirate it delayed debt payments at two of its flagship firms, analysts said. Renewed job cuts could further hurt housing demand.
GLOBAL SHOCK
The crisis in the business hub of the world's biggest oil exporting region has spotlighted the Gulf's lack of economic transparency, and proved an awkward reminder of the risks of investing in emerging markets from Russia to Greece to Mexico.
Analysts said the timing of the news on the eve of the Muslim Eid al-Adha holiday, the lack of prior communication with investors, and the scant details given on the plans has dented Dubai's credibility.
In response, investors around the globe have dumped stocks, bonds, currencies and commodities since Thursday of last week, and sought safe havens in assets such as gold or the U.S. dollar.
The sell-off began in Europe, spread to Asia and then the United States, whose markets were closed on Thursday for the Thanksgiving holiday. European markets dropped 3.0 percent on Thursday but rebounded on Friday, while U.S. stocks closed down 1.0 percent on Friday in response to the Dubai news.
On Friday, one of the world's leading fund managers said that rising fears of a possible debt default at Dubai's biggest company was acting as a catalyst for an "overdue correction" in equities and risk assets following an eight-month rally. Fund managers have been playing catch-up after the financial crisis this year by plowing monies into many speculative investments.
"While many have acknowledged in the last few weeks the growing wedge between market valuations and economic and corporate realities, few have been willing to take their equity exposure down, Mohamed El-Erian, chief executive of Pimco, the top bond fund manager, told Reuters on Friday.
"The Dubai announcement is serving as this catalyst."
Dubai says not responsible for Dubai World debt
Dubai government said on Monday it was not responsible for the debts of Dubai World, dealing a blow to creditors' assumptions that the Arab emirate would guarantee the conglomerate's..."
DUBAI (Reuters) 11/30/09 - The Dubai government said on Monday it was not responsible for the debts of Dubai World, dealing a blow to creditors' assumptions that the Arab emirate would guarantee the conglomerate's liabilities.
"Creditors need to take part of the responsibility for their decision to lend to the companies," said Abdulrahman al-Saleh, director general of Dubai's Department of Finance. "They think Dubai World is part of the government, which is not correct."
In its first statement since the crisis began, Dubai World, the government-controlled holding company at the heart of the storm, said a restructuring would involve $26 billion in debt and mostly affect its property firms, Nakheel and Limitless.
Other firms, such as DP World, Jebel Ali Free Zone and Istithmar World would not be included in the restructuring because they were financially stable, it said in a statement released by e-mail late on Monday night.
The previously unreleased figure of $26 billion may help markets to grapple with the scope of the crisis following estimates that the restructuring could affect $59 billion or more in liabilities.
United Arab Emirates stocks plunged on Monday as investors waited for clarity on Dubai's request for a delay until May 2010 on repaying billions of dollars in debt issued by Dubai World and its Nakheel unit, developer of three distinctive palm-shaped islands in the emirate.
European shares fell as investors worried about sovereign financial crises, with the FTSEurofirst 300 off 1.4 percent. But the U.S. dollar fell against the euro after the United Arab Emirates promised liquidity, easing worries about default.
Saleh's remarks in an interview to Dubai TV, a station owned by the ruler of Dubai, came after UAE markets closed.
"They have confirmed there is going to be a restructuring and are doing what they can to differentiate between the government and companies," said Mohieddine Kronfol, managing director at Algebra Capital.
"It doesn't take away from the fact that you have a major potential event that is unraveling. People's expectations aren't going to be met with this announcement."
The UAE's central bank pledged financial support, helping to steady global markets.
The central bank promised additional liquidity to local banks and an official in Dubai's oil-exporting neighbor, Abu Dhabi, said on Sunday it would offer selective support to Dubai firms.
Without referring directly to the Dubai World debt problems, the UAE's central bank governor said on Monday there was no cause for concern about local banks, which he said had proven themselves able to weather the global crisis.
"I have advice for foreign investors. They should study available investment opportunities and conduct realistic feasibility studies to make sure they are real opportunities with no risk," the state news agency WAM quoted Sultan Nasser al-Suweidi as saying.
Michael Ganske, head of emerging market research at Commerzbank in London, said a default, which could ultimately benefit the region, "is becoming more likely.
"At the end of the day it should be positive for Dubai, Dubai's sovereign risk should go down," he said.
Dubai World -- which had $59 billion of liabilities as of August -- shocked investors last week with news of the standstill request while it restructures, along with its property developer Nakheel. The agreement would affect about $5.7 billion of debt due to mature before the end of May.
Nakheel earlier on Monday asked for three of its Islamic bonds, worth a total of $5.25 billion, to be suspended on Nasdaq Dubai until it was in a position to "fully inform the market.
STANDALONE ENTITY
Saleh made clear on Monday that while the government owned Dubai World, the conglomerate had long operated as a stand-alone entity and was never guaranteed by the emirate's government.
"It deals with all parties on this basis and it borrows based on ... its projects and not the guarantee of the government," Saleh said.
When contacted by Reuters and asked whether Dubai could still repay its Nakheel bond, Saleh declined to comment.
The head of a Dubai budget committee said the government's own debt was $10 billion. "Dubai government's debts have been declared. They are only 10 billions. There should be no confusion between (the government) and any company," Dhahi Khalfan Tamim, also Dubai's police chief, told Al Arabiya television.
Dubai World Chairman Sultan Ahmed Bin Sulayem also declined to comment on Monday. Other Dubai World officials could not immediately be reached.
John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group, said the distinction between the Dubai government and the flagship company appeared minimal.
"What role does the sovereign play? This continues to create uncertainty," he said from Riyadh. "Their motivation is to make a distinction between the two, but the difference ... is nebulous."
Saleh said he believed the market reaction to last Wednesday's announcement by Dubai World, which initially shook global financial confidence, was exaggerated.
"The restructuring is a wise decision that is in the interest of all parties in the long-term but might bother creditors in the short term," he declared.
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