Now the Dubai dream is kaput. “No big player can do business with Dubai now,” says Davidson. “The cost of insuring debt is too high to make it a legitimate business partner and that’s not likely to change.” People view it as a Dubai-centric problem, he says. “So I don’t think the rot will spread. Still, people will look at this and say, ‘How much more will unravel now?’ ”
That question could take years to answer. Respected analysts don’t trust government numbers. Last week, Moody’s upped Dubai’s estimated total debt to US$100 billion. EFG Hermes, a regional investment bank, thinks it could be as high as US$150 billion.
Next up on the Dubai debt calendar is Dubai World’s payment on a $3.5-billion Islamic bond held by Nakheel, due Nov. 14. A crunch creditors’ meeting is scheduled for Dec. 21. Rothschild Bank and Deloitte have been called in to help restructure Dubai World, with the directive to sell assets; this week, the finance minister announced the process would take more than six months. Dubai is angling to keep its profitable properties, among them DP World, the world’s third largest ports operator, and Dubal, Dubai’s aluminium company. State-owned Emirates Airline, the Middle East’s largest carrier, is also off the table—for now. Abu Dhabi, which owns competitor airline Etihad, is rumoured to have offered to buy it, only to be rebuffed. Should it succeed, the fallout could spill over into the aviation sector: between them, the two airlines have more than 400 aircraft on order from Boeing and Airbus; consolidation would result in both companies’ stocks taking a beating.
Up in the air too is Dubai’s Cirque du Soleil stake. Late last week, the Montreal-based company’s spokesman Tania Orméjuste said Dubai’s financial meltdown has had no impact. “Dubai World had already paid its investment,” she wrote in an email, after turning down an interview request. “Our operations as well as our business relationship with Dubai World doesn’t change.” This week, the government announced that the Cirque du Soleil stake was on the block, along with the QEII.
The UAE could have easily bailed out its profligate member, Davidson notes. The current jockeying between Abu Dhabi and Dubai is about politics, not economics, with Abu Dhabi using its financial leverage to reduce Dubai’s autonomy and close links to Iran by shutting out companies and creditors associated with that country. A regime change could be part of the plan as well, particularly given rumours that Dubai Holdings is also insolvent, says Davidson: “They’ve misled investors either wittingly or due to incompetence; neither is particularly palatable. The loss of legitimacy [to the UAE] is massive.”
Still, he doesn’t underestimate Dubai. It’s “a wily operator,” he observes, and its desire for autonomy could lead it to bailout discussions with Iran. “That is the nightmare scenario for Abu Dhabi and the other emirates,” he says. Saudi Arabia, also on poor terms with the UAE, could be another potential Dubai ally, he notes.
The first casualties of Dubai’s burst bubble range from the families in India and the Philippines who depended on money sent from workers, to European banks, among them Standard Chartered, HSBC Holdings, Barclays, and Royal Bank of Scotland, which are estimated to have loaned a total of US$50 billion. Jobs will be lost, Davidson predicts. Even racehorse markets have been affected: only two days after Dubai World asked for a stay on its debt repayment, Sheik Mohammed’s bloodstock adviser spent close to US$2 million buying eight foals. Last week, at mare sales in England, he was unusually frugal. “It’s the first time that anybody can remember that we didn’t see him buy anything,” one breeder told the Financial Times of London.
It may mean nothing. But given the confounding financial mirage that is Dubai, that could be the most ominous indicator yet.
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