The economics of the Arab spring Open for business?

Economic reform in the Middle East could prove harder than in eastern Europe. The West needs to help it along

Jun 23rd 2011 | from the print edition

IS THE Arab spring a 1989 moment? The collapse of communism remade eastern Europe both politically and economically, as vibrant market economies emerged from the rubble of central planning. Optimists argue that democratic transitions in the Middle East and north Africa could transform the region’s lousy economies (see chart). Countries such as Egypt and Tunisia don’t have to build a capitalist system from scratch. But their state-dominated economies need an overhaul, similar in nature—if not in scale—to that in eastern Europe. Unfortunately, though the task is smaller, there are several reasons why it could be a lot harder.

Unlike eastern Europe, all Arab countries (those with oil wealth and those without) have capitalist economies, in which prices and private enterprise play a big role. Yet it is a distorted, patriarchal capitalism, characterised by a dominant state, kleptocratic monopolies, heavy regulation and massive subsidies. This has fuelled corruption, stunted growth and left millions without jobs. High oil prices give petro-economies the wherewithal to counter discontent by dispensing largesse. Those without such wealth face a growing fiscal mess.

Take Egypt. Outside agriculture, over 40% of the economy is in state hands, with a hefty chunk controlled by the army. Private firms are strangled with red tape. Subsidies for food and fuel, worth some 10% of GDP, are busting the budget. The result is that Egypt faces a fiscal crunch as well as an urgent need to overhaul its economic model (see article).

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Related topics

• European Union
• Middle East
• Europe
• Africa
• Egypt

Top of the to-do list is reform of subsidies, so that government handouts are confined to the needy. Next comes a set of measures needed to foster private enterprise: breaking up monopolies, reducing the size of the state and rewriting regulations so that they support rather than suffocate competition. That sounds like a slimmed-down version of the post-communist transition agenda, where privatisation and the creation of competitive markets were also priorities. Unfortunately, the Middle East faces two big problems that eastern Europe didn’t.

First, eastern Europe’s transition had a clear aim: membership of the European Union. For all the EU’s current difficulties, it provided both a powerful political motivator and a detailed reform blueprint. The economies of the Middle East and north Africa have no such lodestar. Joining the EU is not an option. And although European politicians talk of deeper partnerships with the awakened countries, they still refuse to cut the trade barriers that matter, such as those on farm exports.

Second, the appetite for reform is far feebler. East Europeans wanted economic freedom along with democracy. In the Middle East popular anger at corruption and high joblessness have not translated into demands for wholesale economic reform. Quite the contrary. In Egypt the transitional government has expanded subsidies and increased employment in state firms. Economic liberalisation has a poor reputation, thanks to reforms earlier this decade whose fruits flowed largely to the well-connected. Indeed, a desire for vengeance against fat cats helped to bring the crowds onto Tahrir Square.

Fortune and favours for the bold

So the Middle East’s economic transition could be a lot bumpier than that of eastern Europe (which was itself a pretty rough ride at times). The West’s strategy for assistance must change accordingly. Up to now the focus has been on financial help: America has offered debt relief to Egypt, the IMF has lent cash with few strings attached. That buys time but does not promote reform. In future, aid should become more conditional, aimed at helping private enterprise. And far more important than cash will be the West’s willingness to offer freer trade and real integration to the successful reformers and democratisers. Maybe not EU membership, but something close.

The oil market The IEA opens the taps

THE International Energy Agency (IEA) rarely intervenes in oil markets. The rich-country energy club keeps its vast reserves of oil to tackle emergencies caused by unforeseen supply disruptions. Yet on June 23rd the IEA surprised oil markets by saying that it would release60m barrels of oil from its stockpile over a 30-day period to ensure a “soft landing for the world economy”. Oil prices duly obliged by tumbling.

Oil has been drawn from the emergency stockpile of 1.6 billion barrels only twice before—in the immediate aftermath of the invasion of Kuwait in 1999 and Hurricane Katrina in 2005. The disruption to supplies as a result of Libya’s internal conflict became apparent some time ago and the 1.4m barrels a day denied to world markets, which all together get through nearly 90m b/d, is hardly the sudden upheaval that the stocks are there to offset.

The IEA says that Libya is the reason for the decision to release stocks. Although its oil has disappeared from the market, the damage has not been fully felt yet, since the world consumes much more oil in the second half of the year as the northern hemisphere's “driving seasons” begin. The IEA reckons on a shortfall of 2m b/d as engines rev up around the globe and that a barrel of Brent crude (which slumped from around $115 to trade at $108 a barrel after the announcement) could climb even higher to wreak appalling damage on a fragile world economy.

Yet there are a couple of reasons to question the IEA’s decision. Firstly, evidence is mounting that the high price is having an effect on demand both in rich countries and even in oil-thirsty Asia and that prices might slip anyway. Second, despite acrimonious disagreement at the recent OPEC meeting between the haves and have nots of spare oil-production capacity, which meant that expected quota increases failed to materialise, Saudi Arabia has promised unilaterally to make up for most of the Libyan shortfall by pumping 1m b/d extra. The IEA says that its intervention (done with Saudi acquiescence, the agency hinted) is designed to plug the gap between now and when that oil might appear on the market.

Cynics are suggesting that Barack Obama is keener than most to tap the stockpiles—he has hinted that this is what he wants several times of late—to protect Americans from the ever more stiff cost of filling up. Indeed America, where the driving season is about to get under way, will contribute half the extra oil. Plugging a supply gap is all very well. But this sets an unfortunate precedent that the stockpiles are there to smooth the ups and downs of the oil price rather than to guard against genuine emergencies. Moreover, any interventions by the IEA cannot be sustained over the long term when (high) prices will be determined by voracious Asian demand and the difficulties of finding and extracting extra barrels from beneath the earth.

Overall, the best solution to a high oil price is a high oil price. Tinkering with that equation is rarely a good idea.

地震衝擊不及利比亞？

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日本核危機得以紓緩，環球股市反彈，但北非國家利比亞的局勢仍令人憂慮。商務部發言人昨天被問到日本地震對中國的影響時，直言衝擊有限。不過對於利比亞問題時，就承認事件確實對中資企業造成了相當大的影響，涉及的合同金額高達188億美元。加上事件刺激國際油價上升，對依賴石油入口的中國不利。而親北京的卡達菲或將下台，影響中資企業日後在該區爭取工程的機會。難怪中國政府近日對利比亞言行不一，兩邊討好，似乎正在買一個政治保險。

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數據顯示，中日貿易額每年近3千億美元，佔中國對外貿易10%，加上今次受地震影響的日本東北部，主要生產電子及汽車產品，對中國相關行業或會帶來影響。但目前企業仍有一定庫存，亦可嘗試在國內找尋一些替代廠家，而且相信日本很快可以恢復生產，影響有限。反而日本受災後對日用品需求大增，受核輻射影響地區更需要大量農產品及食品，對中國出口可能帶來刺激作用。

損失188億美元

所以，對於日本地震所帶來的影響，中國並不太擔心。反而更令中國擔心的是利比亞的局勢。繼早前中國中冶（1618）公布，旗下子公司兩個工程項目受到影響，合計未完成合同金額約為51.31億元人民幣，以及中國鐵建（1186）公布，在利比亞未完成合同額達35.5億美元後，商務部昨天首次披露，內地企業在利比亞承包的大型項目共有50個，涉及合同金額達188億美元。

相關損失需要由企業及保險公司負責，報道指，中國信保近期已向中國葛洲壩集團，以及中國建材（3323）母公司旗下中建材進出口公司分別獲得賠款1.62億元和4815萬元。暫時未知中冶及中鐵建的項目是否也能得到賠償。

不過，除了眾多中資企業一次過的損失外，後續的影響才令中國更頭痛。近期的戰火已令該國產油量大減，刺激油價急升至100美元以上。統計顯示中國去年原油進口量達到每日479萬桶，對外依存度超過55%，2010年進口原油的平均費用比2009年增加了29%，達到了每桶77.05美元。

目前油價持續上升，將令中國面對更嚴重的輸入性通脹，對企業發展帶來負面影響，就算再進一步收緊銀根，亦未必能降低通脹。所以近日，溫家寶總理亦對國際油價走勢表示關注，並稱油價每桶超過100美元時，他也感到吃驚。

根據內地油價調整機制，在近期國際油價不斷上升的情況下，目前已到達要再次調升成品油價的時間。不過，加價則會進一步推高通脹，不加價則會令油荒問題再次出現，進不得退不得，所以難怪溫總也感到兩難。

除了油價的難題之外，還有企業「走出去」的發展機遇預計亦會受到今次事件的影響。目前北非正是中國海外投資的重要地區，商務部昨天公布，去年中國在海外投資額為590億美元，而今次受影響的合同金額達188億美元，可見利比亞市場對中國海外投資的重要性。

「走出去」機遇受損

只不過，以目前的形勢所見，與北京關係友好的卡達菲政府極可能下台，而親西方的政治力量有望崛起，預計可能令中國企業未來在爭取該國的基建、石油等項目帶來困難。

為了不要得罪曾經的朋友卡達菲，以及未來可能得勢的反政府力量，中國近日就做出頗為「騎牆」的舉措。一方面不否決聯合國安理會提出對利比亞採取軍事行動的決議，只在表決中投了棄權票。另一方面，內地官方媒體則發表評論文章，批評有關的行為，並重申中國反對干涉別國內政的立場。

目前戰事持續，油價站穩100美元之上，對全球經濟都帶來不利的影響。中國的「騎牆」態度能否為日後的利益買下保險，還是兩面不討好，還有待時間證明。不過對於中冶及中鐵建兩家企業來說，目前似乎仍未擺脫弱勢，投資者暫時還是遠離為妙。

Dubai is worth more than you think

Posted by Izabella Kaminska on Dec 17 14:39.

That is, Dubai EFS crude — rather than the emirate itself — is worth more than you think.

As Morgan Stanley highlighted in its commodity outlook for 2010, Dubai crude, which historically traded at a discount to Brent crude due to its heavier and sour quality, has managed to trade at a premium to Brent on several occasions in 2009.

Here’s the chart:

The investment bank predicts this will happen with even more consistency in 2010, as light-heavy spreads stay narrow and Asian refinery capacity continues to ratchet higher against lower US and European refinery throughput.

As they explain:

The IEA is expecting Asian crude demand to eclipse North American in early 2010, we see no reason to disagree with this forecast. Not only is the volume of Asian refinery capacity increasing rapidly — we count almost 1 mmb/d of incremental CDU capacity coming on line in Asia in 2010 — but the high complexity of the new refineries is also quickly eroding Brent’s quality premium.

And here’s a chart showing just how impressive that surge in Asian refining has been this year:

Related links:
Nothing bullish in crude – FT Alphaville
Not just a refinery, a super refinery – FT Alphaville
Why refinery shutdowns matter - FT Alphaville

The shifting sands of UAE bank capital

Posted by Tracy Alloway on Dec 01 15:45.

Here’s some useful data from ratings agency Fitch - a breakdown of how the capital of banks in the United Arab Emirates is likely to be impacted by the Dubai World debt restructuring.
It’s basically an updated version of Fitch’s capital sensitivity test for UAE banks, which the rating agency first conducted in September 2009:

The test (for those interested) assumes two years of ’stressed’ pre-impairment profit of 80 per cent of 2008 audited profits, and zero growth in risk-weighted assets. The test also assumes coverage of non-performing loans at 100 per cent and earnings retained rather than paid out as dividends.
Thus, according to Fitch:
These developments will add pressure on Fitch’s Individual Ratings for UAE banks and the agency will closely monitor developments and will comment further as more information becomes available. Most of the Long‐Term Issuer Default Ratings assigned to the UAE banks factor in support being provided from the UAE authorities, and as Fitch’s current view of the willingness to provide support has not changed, there are no additional Long‐Term IDR actions aside from the rating actions taken on 27 November 2009 (Dubai Bank, TAIB Bank, Tamweel; see www.fitchratings.com).
While the banks with the greater exposure concentration to Dubai generally are likely to be the most exposed — directly and indirectly — to DW and Nakheel, the larger banks in the UAE are unlikely to have avoided having exposures, given the size of their balance sheets and franchise across the whole of the UAE. To date, National Bank of Abu Dhabi (NBAD; rated ‘AA−’/Stable Outlook) is the only UAE bank to publicly acknowledge its exposure to the DW group, at USD345m, which is modest relative to its earnings and equity base.
. . .While the last reported date NPL and capital levels appeared comfortable across the sector, the results of the sensitivity test show that Dubai‐based banks’ capital positions were more sensitive to rapidly rising NPL trends. In particular Dubai Bank (rated ‘BBB−’/Negative Outlook) is clearly the most sensitive, with the test showing that NPLs would only have to rise by a moderate double digit percentage for a capital ratio of 12% to come under threat. Dubai Islamic Bank (Support Rating: ‘1’) is next, with a 166% increase required, however this is using end‐2008 NPLs, which are certainly higher now and so the absorption ability is lower than this. Most of the Abu Dhabi banks (which benefited from capital injected earlier in 2009) are less sensitive, with the exception of Abu Dhabi Commercial Bank (ADCB; Support Rating: ‘1’) whose 12% ratio comes under threat if its NPLs rise by 80%. The smaller banks in the other emirates also appear to be less sensitive than Dubai’s banks and ADCB.
Although, in general bank capital ratios have strengthened during 2009 as the institutions reduced cash dividends, slowed loan growth, converted federal deposits into Tier 2 capital and in some cases received direct injections of Tier 1 capital from their respective emirates’ governments, Fitch expects ongoing pressure on capital ratios. If rising impairments over the next six months are largely limited to DW and its related entities, the impact should be manageable for the banking sector, although such an outcome remains highly uncertain.
The reference to assumed UAE state support being factored into Fitch’s UAE bank ratings is interesting given that some seem to have wrongly assumed that the Nakheel sukuk also had implicit government support. Indeed, ‘implicit’ state support for some bank capital instruments seems to be dying a slow death in Europe, with Fitch now supposing that government support for banks does not extend to hybrid bondholders.
Of course, the UAE on Sunday pledged to ‘stand behind‘ its banks, and provided them with an uncapped liquidity facility, so state support does look to be a reasonable given for now. But nevertheless, according to Fitch, there are some headwinds facing UAE banks:To address any potential liquidity pressures for the sector, on 29 November 2009 CBUAE put in place an uncapped liquidity facility for use by both local and foreign banks operating in the UAE at a rate of 0.5% over the local interbank interest rate. The damage to Dubai’s reputation by DW’s announcement may negatively impact the banking sector’s ability to return to the debt capital markets following NBAD, ADCB and First Gulf Bank’s recent successful issuances. Emirates NBD PJSC (rated ‘A+’/Stable Outlook) remains one of the biggest issuers by value and had said that it would look to issue in early 2010, which may now be delayed and hence reduces its options for repaying a total of AED7bn of debt due during 2010. Loans/deposits ratios for the largest banks remain above 100%, putting further pressure on the banks’ ability to lend to support future economic recovery.

Related links:
Dubai world - the $26bn debt workout begins - FT Alphaville
What next for Nakheel? - FT Alphaville
The issue of shariah compliance and the Nakheel sukuk - FT Alphaville
What can Nakheel sukuk holders expect in a default? - SharingRisk dot Org

Tuesday Dubai doom and gloom

Posted by Tracy Alloway on Dec 08 12:00.

Dubai doom and gloom comes in the form of two things on Tuesday morning.
First — a mass Downgrade of Dubai Inc. companies by Moody’s, the text of which is below:
Moody’s announces further downgrades to Dubai Inc. corporatesDIFC, December 08, 2009 — Moody’s Investors Service today downgraded all six Dubai government-related issuers (GRIs). This rating action follows recent comments and statements from government officials, which cause us to believe that no meaningful government support should be assumed forany entity that is not directly part of or formally guaranteed by thegovernment. As a result, Moody’s has reduced the government supportassumptions for all six issuers. All ratings now reflect the respectivecompany’s stand-alone credit profile (baseline credit assessment) withthe exception of Dubai Electricity & Water Authority (DEWA) and DIFCInvestments, whose revised ratings include one notch uplift forgovernment support recognising their stronger strategic linkage toDubai’s core economic development policies.Moody’s has also downgraded various baseline credit assessments toreflect (1) increased liquidity challenges in a tougher financingenvironment that we expect will continue for a protracted period, and (2)the longer term implications thereof on Dubai’s economy.Ratings affected by today’s rating actions include the following:- DP World issuer and debt ratings were downgraded to Ba1 from Baa2;- Dubai Electricity & Water Authority (DEWA) issuer and debt ratings weredowngraded to Ba2 from Baa2;- Jebel Ali Free Zone (JAFZ) issuer and debt ratings were downgraded toB1 from Ba1;- Dubai Holding Commercial Operations Group (DHCOG) issuer and debtratings were downgraded to B1 from Ba2;- Emaar Properties issuer ratings were downgraded to B1 from Ba2;- DIFC Investments (DIFCI) issuer and debt ratings were downgraded to B2from Ba1.All ratings remain on review for further downgrade.Since the announcement by the Dubai government on November 25 that it would restructure the debt of Dubai World and request a standstill onfinancings of some of its liabilities, the government has further clarified its position towards GRI obligations. In recent statements the government has highlighted that it sees no legal obligation to support non-guaranteed debt of its GRI’s. GRI’s that are able to demonstrate aviable business model and an ability to service their debt obligations over the long-term remain eligible for support from the government’sFinancial Support Fund. Taking into account the government’s most recent position, Moody’s no longer believes it appropriate to assume timelysupport that results in any uplift for the ratings of four of the GRIs.We view the probability of support for DEWA and DIFC as being diminishedbut sufficient to lift these ratings by one notch . . .
The second dose comes courtesy of Bloomberg, which reports that Nakheel managed to jump from a 2.65bn-dirham profit in the first half of 2008, to a staggering 13.4bn-dirham loss in the first-half of 2009.
From the newswire:Dec. 8 (Bloomberg) — Nakheel PJSC, the Dubai World-owned property developer seeking to renegotiate debt, had a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property, according to a document obtained by Bloomberg News.The loss for the company, which is building palm tree-shaped islands off the emirate’s coast, compared with a year-earlier profit of 2.65 billion dirhams, according to itsfinancial statement for the six months to June. Revenue fell 78 percent to 1.97 billion dirhams. A spokesman for Dubai World,Nakheel’s parent, declined to comment.
Ouch.
Emerging markets — and European banks — are currently (pretty much) down across the board.

Related link:
Dubai World restructuring to take months - FT

S&P’s impeccable timing, Islamic finance edition

Posted by Stacy-Marie Ishmael on Dec 08 11:40.

The world of Islamic finance has been roiled by the upheavals in Dubai: questions abound over such matters as the structuring of al-ijarah sukuk like the $3.5bn bond issued by Nakheel, Dubai World’s real estate development subsidiary.
As the FT noted in a special report — The Future of Islamic Finance — on Monday:
For a while it was almost as if the global financial crisis had not happened. Or at least, that is how it looked in some areas of Islamic finance. Then, along came the Dubai debt bombshell, which put the asset class in the spotlight for all the wrong reasons.
Uncertainty over payments to bondholders of the world’s biggest sukuk, or Islamic bond, the $3.5bn deal from Nakheel, the emirate’s property developer, could pose grave problems for the standing of Islamic finance.But even prior to the shakeout in the emirate, certain types of structures — notably tawarruq and tawarruq munazzam — had been criticised by scholars as essentially “un-Islamic”.
So Standard & Poor’s latest report on the prospects for Islamic banking in the Gulf, released on Monday, was timely.
According to the report, which bears the title “Islamic Banking Has Reached Critical Mass In The Gulf After Sustained Growth, And Expansion Is Set To Continue”:
We believe longer-term growth prospects are still good, though, as we expect Islamic banking products to continue replacing plain vanilla conventional products and services.
Overall, the rating agency was cautiously optimistic on the sector:We believe that growing demand, active government backing, easy substitution between Islamic and conventional products, and efforts by conventional players to develop their footprint in this field are all indicators that the market share of Islamic banking will continue to progress. However, we do not expect Islamic banking to grow at the same pace as in the past decade. Several factors are likely to constrain its development in our view:• Not all conventional products have an Islamic equivalent. This is especially true for treasury products and liquidity management tools (see “Risk Management For Islamic Financial Institutions: A Rating Perspective,” published on Jan. 15, 2008).• Limited product standardization constrains the integration of market players into the international financial sphere. It is unclear at that stage if in the medium term banks will be able to distribute standardized Islamic banking products throughout a market continuum from the Middle East to Southeast Asia and beyond, or if the Islamic finance market will remain geographically compartmentalized, limiting economies of scale.

Related links:
The issue of shariah compliance and the Nakheel sukuk - FT Alphaville
Nakheel and the sukuk legal spook - FT Alphaville
Sharia-compliant derivatives - a contradiction in terms? - FT AlphavilleSocGen in move into Sharia funds - FT

Nakheel bondholders are having a ‘temper tantrum’

Posted by Izabella Kaminska on Dec 10 10:55.

The UAE’s English language newspaper The National put out a snippy editorial on Wednesday, lecturing about the perils of moral hazard and the like.
In short, it told Nakheel bondholders to get over themselves, summing up their reaction to Dubai’s standstill on Nakheel obligations as nothing short of a hissy fit:Dubai World’s creditors responded with a temper tantrum in the international media. To read the coverage of Dubai’s announcement, one might think Dubai and the companies it controls are ready to miss payment on their entire $85bn in estimated debts.
Stupid investors.
The National goes on:
Investors mistook being government owned with being government backed. Governments in emerging economies end up starting and controlling much of the corporate scene. Eventually, if all goes well, they privatise those companies to eliminate the conflict of interest.Until then they are major shareholders, with limited liability, like Richard Fuld was the largest shareholder at Lehman Brothers. He walked away from that wreck. Much of the coverage of Dubai’s predicament has been from the perspective of its creditors, not from that of the Government trying to figure out which businesses are worth saving and which aren’t. Little wonder: the Government has been cryptic(隱祕); investors vociferous (喧嚷的).
As for the restructuring process:
Clearly, the Dubai Financial Support Fund, which is in charge of disbursing, and making sure it is paid back, the $10bn in rescue funds Dubai borrowed from the Central Bank in February, took a hard look at Nakheel’s business prospects and decided that paying off its bonds at par might not be the smartest use of the money. Electing not to bail out Nakheel, after all, would leave more cash to help out more promising businesses. This is the way debt restructurings work. They are like divorces –messy. Debtors threaten to default. Sometimes they do. Creditors threaten to foreclose. Sometimes they do.
In all, according to The National, Dubai’s government is doing a very sound thing indeed.
Above all, it’s not encouraging the sort of bailout-associated moral hazard the West has partaken in, a process which might otherwise have led to:
… try this scenario for size: imagine that every debt for whatever project, no matter how extravagant, was guaranteed. If companies couldn’t come up with the cash, the Government would, even if it had to fork over barrels of crude oil. Try to picture the pandemonium that would cause.Anyone with any hare-brained investment scheme could borrow as much as they wanted. Secure in the knowledge that their debt was guaranteed, they could build edible skyscrapers of Swiss chocolate reinforced with candy canes, so high that on a clear day you could see Riyadh. They could cool them with icebergs towed from Greenland or just let the whole thing melt in summer into a big pile of delicious chocolate-mint rubble. It wouldn’t matter. Creditors could be certain that no matter how ridiculous the project, they would be paid.

Statement From Sheikh Ahmad Bin Saeed Al Maktoum

Posted by Neil Hume on Dec 14 06:34.
14 December 2009

The Government of Dubai, acting through the Supreme Fiscal Committee (”SFC”), today announces a set of actions in relation to Dubai World:
Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee said: Like other global financial centers, Dubai has faced recent market challenges driven by global economic slowdown and severe real estate market correction.
Recently, Dubai World announced that it might not be able to commercially support its obligations. Since that time, the Government of Dubai has worked closely with the Abu Dhabi Government and the UAE Central Bank addressing and assessing the impact of Dubai World on the UAE economy, banking system and investor confidence. The following provides comprehensive set of actions: First, the Government of Abu Dhabi and the UAE Central Bank have agreed to provide important support.
Specifically, the Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World.
As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today. The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 – conditioned on the company being successful in negotiating a standstill as previously announced.
In addition, the Government of Dubai is particularly focused on addressing the concerns of Dubai World trade creditors within the Emirate of Dubai. To help address these concerns, today the Government of Dubai is announcing that the remainder of the funds provided will be used for the satisfaction of obligations to existing trade creditors and contractors. Discussions with affected contractors will begin in short order.
Next, the central bank is also prepared to provide support to local UAE banks.
Finally, today the Government of Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.
Today’s actions, taken together, demonstrate our strong commitment as a global financial leader to transparency, good governance, and market principles. There will certainly be challenges periodically, just as there are challenges in other major financial centers around the globe. We believe today’s actions will best serve the interests of all stakeholders.
We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices. Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come. The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy.
The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders.”

Related link:Nakheel says it will pay/ Abu Dhabi rides to rescue – FT Alphaville

Dubai - Saving the day

Dec 14th 2009From Economist.com
Abu Dhabi rescues Dubai after all

DUBAI, one of seven members of the United Arab Emirates (UAE), is now in the middle of its international film festival, which includes “City of Life”, a film set in Dubai and directed by a local. But the most gripping cliff-hanger is playing out in Dubai’s debt markets. On Monday December 14th Abu Dhabi, the wealthiest member of the UAE, arrived on the scene at the last moment to rescue its neighbour from the brink of default.
It provided $10 billion to Dubai’s government, more than enough to repay the $4.1 billion due on Monday to holders of a sukuk, or Islamic bond, issued by Nakheel, a prominent developer. Nakheel belongs to Dubai World, a holding company owned by the Dubai government, which less than three weeks ago requested a standstill on repayments of $26 billion of debt, perplexing investors and panicking global markets.
Just as every film-goer knows that the damsel in distress will be saved in the end, so Dubai’s creditors had long assumed that the emirate would be saved by its oil-rich neighbour. But the standstill announced on November 25th departed from this script, creating genuine suspense.
Investors knew Abu Dhabi could not let its neighbour fail without damaging its own economic interests. They assumed that Abu Dhabi knew this too. Therefore when it let Dubai walk to the edge, it was deeply unsettling. Either Abu Dhabi's policymakers did not know the damage this would do, or they did not care. The announcement on Monday suggests that Abu Dhabi did care. It just did not anticipate quite how badly creditors would react.
Nakheel’s creditors can now be repaid, but Dubai’s credibility cannot be repaired so easily. Its solvency rests on a relationship with its neighbour that is impossible to fathom. At least this latest handout dropped the fig leaves that disguised Abu Dhabi’s previous gestures of support. It was given directly from one government to the other, unlike the $10 billion routed through the UAE’s central bank in February and the $5 billion lent in November through two commercial banks partly owned by the Abu Dhabi government.
Even now, Dubai’s creditors cannot expect every claim to be redeemed in full. The money left over after the Nakheel sukuk is repaid will go to Dubai World’s suppliers and contractors, who endured a standstill on payments long before the company asked the same of its creditors. The money will service Dubai World’s other debts only if the group is “successful in negotiating a standstill as previously announced,” the statement says.
If those negotiations falter, Dubai World’s fate will be governed by a brand new “reorganisation law”, unveiled on Monday. The UAE already has a bankruptcy law, but almost no one uses it. Any creditor foolhardy enough to test the regime can expect to recover just ten cents on the dollar, the World Bank calculates.
The new decree instead appoints three judges from the Dubai International Financial Centre (DIFC), a 110-acre “free zone” with its owns laws, written in English and based on common-law principles. The judges include one who formerly sat in the High Court of England and Wales and a Singaporean who previously served on his country's Supreme Court. They will apply DIFC law, with some tweaks, including a provision to allow for an automatic stay on creditors’ claims.
Their expertise will not be needed if Dubai World’s creditors now come to terms. The chances are good that they will. The shock they have suffered over the past three weeks may have softened them up. And the underlying case for a restructuring of Dubai’s debts has some merit, even if the government has so far handled it abysmally. Dubai, one might say, has had one life. Now it must make a success of its second.

S&P and Fitch to Dubai: ‘not so fast…’

Posted by Miles Johnson on Dec 14 15:34.

Ratings agencies Standard & Poor’s and Fitch have issued responses to Dubai’s surprise repayment of the now infamous $4.1bn Nakheel sukuk.
And just in case the emirate was labouring under any misconceptions, both make it clear that the $10bn chucked its way by Abu Dhabi will have no impact on the ratings of any Dubai Government-Related Entities (GREs).
Standard & Poor’s Ratings Services considers this announcement as a step towards rebuilding confidence in Dubai’s policy-making environment. In particular, we believe the intention to strengthen the laws governing the Dubai World restructuring is an opportunity for the Dubai government to demonstrate the workings of its legal system in dealing with such events. Moreover, we view the intervention of Abu Dhabi as an indication that it stands ready to safeguard the stability of the UAE economy and financial system.
However, we believe uncertainty remains as to the Dubai government’s general ability and willingness to provide timely extraordinary support to its government-related entities (GREs), as well as the transparency and predictability of such support. The remaining financial obligations of Dubai World and Nakheel, amounting to around $22 billion, remain the subject of a restructuring. Therefore, we will continue to monitor the situation closely, and any ratings action we take on Dubai-based GREs based on the question of potential government support will be grounded in clear and publicly stated policy that is supported by appropriate laws and/or instruments.
The subtext here is clear. Dubai cannot hold its fate in its own hands. As such, nothing is certain about its credit risk.
Investors will continue to make wagers on Abu Dhabi’s continuing support for its financially challenged cousin. But the grounds for this argument – that the damage to the richer Emirates’ reputation if Dubai were default serves as a implicit guarantee – is hard to quantify.
Judging from the opacity(不透明)of the bailout and Nakheel repayment, both emirates will need to work harder to restore confidence in the region.
Legal and procedural transparency is key for international investors and rating agencies alike, as is a move towards international bankruptcy standards.
Dubai has said it will begin a “comprehensive reorganisation law”, a boon to investors exasperated by the emirate’s primitive bankruptcy laws.
This would, as Fitch note, make doing business in the region less of a hair-raising prospect for creditors.
While questions remain on how this change will practically affect creditors, this action is clearly aimed at facilitating easier corporate restructuring. In turn, this has the obvious ancillary benefit of making it simpler for future corporate debt obligations to be addressed through court-based restructurings, rather than through a sovereign bail-out, reducing the pressure on Dubai to continue offering financial support to corporate entities, and on Abu Dhabi to accede to further financial pressures in the neighbouring emirate.
But Monday’s statement provides little clarity on how these reforms will work in practice. Fitch expect the changes to be based on the code currently employed by the Dubai International Finance Centre, Dubai’ financial free zone. S&P also welcome the move, but argue that the remaining uncertainty overpowers any positive impact this could have on the ratings of Dubai-related companies.
Abu Dhabi’s surprise largesse will not erase the disasters of the last month – throwing money at problems doesn’t always make things better. At best the bailout is a palliative(緩和的) for the emirate’s ills; at worst a further example of a region that views itself above the norms of international finance.
Until the workings of the region’s financial system become clearer, the stink of Nakheel incident will linger like a stagnant(停滯的) water in a 75 km Arabian canal.

Related links:
Statement From Sheikh Ahmad Bin Saeed Al Maktoum – FT Alphaville
Abu Dhabi steps in to bail out Dubai – FT

CDS report: Greece and Dubai spark risk aversion

Posted by FT Alphaville on Dec 08 17:55.
Markit’s Gavan Nolan wrote this CDS report

In what is becoming a familiar story sovereigns again drove direction in the financial markets, with nations in Europe and the Middle East causing volatility. The Markit iTraxx Europe index was just under 1bp wider at 81.5bp, a resilient performance given the sell-off in equity markets. The Markit iTraxx Crossover index was 4bp wider at 496bp, while the Markit iTraxx HiVol index did better, tightening by nearly 2bp to trade at 121bp.Greece’s spreads widened significantly yesterday after S&P warned that it could cut the sovereign’s rating to BBB+. They widened even further today when Fitch delivered on its own downgrade promise. The agency cut its rating to BBB+ and kept it on negative outlook, where it has been since the end of October. The rationale for the downgrade was all to familiar to the markets: the country’s ballooning debt burden and doubts about the government’s ability to reduce it. Greece has an unenviable record when it comes to keeping public finances in order. The government is focusing on improving tax revenue collection, a necessary measure but one that should be accompanied by measures to trim is bloated public sector. More volatility can be expected in the coming weeks and months as confidence in the government fluctuates.
The volatility was not confined to the credit and equity markets. The euro fell sharply against the dollar, though a flight to quality into the dollar also contributed to the adjustment. The latter movement was somewhat odd given that Moody’s warned that the US and the UK were more at risk of a downgrade than other AAA-rated countries.
Dubai - remember, the profligate city state in the Middle East - added to the risk aversion. The emirate’s finance minister said today that the restructuring of Dubai World would take longer than the six months previously requested. This not that surprising given the complexity of the company and the untested legal environment. The Moody’s downgrades of DP World and other state-owned - but not state-guaranteed - firms were also expected. But there is some uncertainty over how the restructuring will play out, particularly around the upcoming Nakheel bond, and this could be contributing to the widening.
There was a small tightening bias among single names, with banks underperforming amid concerns over their Dubai exposure. Unsurprisingly, Greek credits such as Hellenic Telecom widened significantly. TNT also widened on news that two funds have taken a 5% stake in the Dutch postal services group. Credit investors have long expected a sale but would prefer one of the US giants - UPS or FedEx - to a private equity group
In North America the Markit CDX IG index was just under 1bp wider at 97.8bp, broadly in line with the stock markets. Widening credits dominated, with consumer sensitive credits suffering after supermarket chain Kroger reported disappointed results. Weak sales from McDonald’s also weighed on the market.

Greece and Dubai show system remains unstable

By Gillian Tett
Published: November 26 2009 20:35 Last updated: November 26 2009 20:47

A watershed in the derivatives world could be reached this week: the cost of insuring against a bond default by Greece, using credit derivatives, may rise above the comparable metric for Turkey for the first time.
Just two short years ago, that would have seemed almost inconceivable to most credit default swaps traders, never mind proud Greek politicians. After all, in 2007, the Turkish CDS spread – like that of many “emerging markets” – was trading at about 500 basis points on perceived fiscal risks.
Greece, by contrast, was nearer 15bp, because it was a member of the European Monetary Union, and its euro-denominated bonds were considered quasi-protected by other euro states.
But in the past year the fiscal positions of many emerging markets nations, such as Turkey, have become more favourable relative to the western world. Meanwhile, Greece has plunged into a profound budgetary mess, notwithstanding its use of the euro.
Thus on Thursday – as markets reeled from the Dubai shock and investors fled from risk – the bid-offer spread on five-year Greek CDSs was 201bp-208bp, according to Markit. That of Turkish CDSs was 207bp-212bp, leaving them neck and neck (and according to Bloomberg data, in some trades the Greek CDS was even higher than Turkey).
All this is a bitter blow to Greek pride. However, there is a much bigger moral here, which cuts to the heart of the Dubai saga, too.
Two years ago, global investors generally did not spend much time worrying about so-called “tail risk” (a banking term for the chance that seemingly remote, nasty events might occur). After all, before 2007, when the world was supposedly enjoying the era of the “Great Moderation”, the world seemed so stable and predictable that it was hard to imagine truly unpleasant events occurring.
But in the past two years, a seemingly safe financial system has crumbled, and – to paraphrase Lewis Carroll – investors have repeatedly been asked to believe six impossible things before breakfast, ranging from the collapse of Lehman Brothers to the implosion of Iceland (and much else). Tail risk, in other words, has leapt into investor consciousness.
And while the financial markets have stabilised in the past six months, that lesson about tail risk cannot be easily unlearnt. The sheer psychological shock of 2007 and 2008, in other words, has left investors looking like veterans from a brutal war. Long after the fighting has stopped, the mere sound of a “bang”, is apt to leave them running for cover.
All this does not mean – let me stress – that it is correct to expect the world to melt down imminently. The fact that the CDS spread for Greek bonds has swung from 5bp to 200bp, in other words, should not be interpreted as a sign of an imminent Greek default, or a likely break-up of the euro. The CDS market is pretty illiquid and prices can swing on low volumes.
But what the CDS market does capture is the perception of tail risk, or low-probability outcomes. Or, to put it another way, the market projects what could occur if the current fiscal and political situations were taken to logical extremes.
Much of the time investors are tempted to ignore those logical extremes. After all, they have known for months that Dubai World was dangerously over-leveraged. They assumed that this would not be too dangerous, because they thought that foreign investors would always be protected.
Now, however, that assumption has been challenged. Tail risk has resurfaced with a vengeance. Little wonder that the CDS spreads of some other debt-laden emerging markets, such as Hungary, swung wider, too, on Thursday. Nor that the Greek CDS moved as well.
For while investors used to assume that it was just emerging market countries that were prone to suffering truly nasty fiscal shocks, the debt fundamentals in Dubai are not necessarily so different from those in developed nations, be that Greece or even the US. Suddenly the line between “emerging” and “developed” countries is becoming more blurred.
So perhaps the best way to view the events in Dubai – and the Greek CDS price – is as a welcome wake-up call. In recent months, a sense of stabilisation has returned to the financial system as a whole, as central banks have poured in vast quantities of support. A striking liquidity-fuelled asset price rally has also got under way.
But the grim truth is that many of the fundamental imbalances that created the crisis in the first place – such as excess leverage – have not yet disappeared. Beneath any aura of stability huge potential vulnerabilities remain. If Thursday’s events prompt investors to remember that, so much the better; not just in Dubai but in Greece, too.

Stopped in its tracks

By Roula Khalaf, Simeon Kerr and Andrew England
Published: December 1 2009 19:55 Last updated: December 1 2009 19:55

Expatriates are back to fretting about their jobs and the fate of property prices; locals are venting their anger at top officials who overborrowed to build increasingly outlandish projects. All residents are stunned at how a famed model of brash, extravagant growth has been transformed from a beacon of hope for an entire region into a case study in crisis management.
Welcome to Dubai. The skyscraper-studded Gulf city is a changed and chastened place since last week, when neither its own government nor that of Abu Dhabi, its oil-rich partner in the United Arab Emirates, showed willingness to stand behind the $59bn (£36bn, €39bn) in debts amassed by Dubai World, a flagship investment company that many investors had assumed enjoyed state backing.
In coffee shops and in the majlis meeting rooms of Dubai’s villas, locals are venting their ire at the ruler’s top lieutenants who, while building a modern city, also weighed it down with a debt burden estimated on Tuesday by Moody’s at $100bn.
The damage caused by Dubai’s debt tremor threatens to affect the UAE as a whole: the wealthy capital as well as its brethren. But while Abu Dhabi, with more than 90 per cent of UAE oil wealth, has the means to emerge little scathed over the longer term, the “Dubai model” that had enthralled and irked onlookers in almost equal measure over the past decade is likely to be radically reshaped.
Yet for all the dismay among investors at the decision to call a standstill on Dubai World’s debts, foreign businessmen and analysts are being careful not to write off Dubai’s role as the region’s premier service hub. Although nearby cities including Abu Dhabi itself and Qatar’s Doha have been trying to catch up and establish themselves as regional centres, even a smaller, more sober Dubai will have two main advantages: a more liberal culture and a well-developed international transport infrastructure. The Jebel Ali free trade zone by itself accounts for as much as one-quarter of Dubai’s economy.
But to protect that position, bankers and analysts say Dubai will have to learn from its mistakes and shed the cocksure attitude of recent years that had turned it into something resembling a highly leveraged private equity firm sinking money into fanciful real estate projects and questionably valued assets abroad. This will require a change in the way that Dubai manages its finances as much as a change in mindset.
The globalised village
The sleepy fishing village of Dubai lured in Iranian traders by going tax-free at the start of the 20th century. It was hit hard by the collapse of the pearling industry in the 1930s but by the 1960s oil exports were funding large infrastructure projects. Mindful of its modest reserves, however, the city invested in commerce, aviation and tourism, attracting multinationals with its no-nonsense bureaucracy and tolerance of western lifestyles. This decade it drew in media and finance businesses and permitted foreigners to buy property, leading to a frenzy in the sector that ended with the 2008 global economic crisis.
“I don’t think any other centre in the area can replace the Dubai model,” says Ibrahim Dabdoub, head of National Bank of Kuwait, a regional commercial bank. “Dubai has first of all the culture: to be a financial centre is not just to have a law, it’s a culture. It’s the immigration officer at the airport, the porter at the hotel, the way you get a licence in a couple of days instead of [it] taking months.”
The problem, however, was that “Dubai went overboard with borrowing which had nothing to do with the original business model ... The services economy turned into an investment fund.”
For many of its residents – 90 per cent of them are foreign nationals – Dubai has held a unique position. The open city blended Russian money and Iranian capital, low-wage Indian and Pakistani workers and rich Arab financiers into a stratified melange of nationalities where each community was supposed to know its place.
The locals hold the top positions. Indians, by far the largest and deepest rooted expatriate group, span labouring class to white-collar office workers; the British have been the traditional managerial class; the Lebanese the bankers and advertising executives; and Filipinos the domestic workers and shop assistants. Many Chinese also arrived in recent years to cash in on a flourishing trade route.
Within the Arab world in particular, young people identified Sheikh Mohammed bin Rashid al-Maktoum as a modern leader who was more interested in business than politics and had put their region on the global map for all the right reasons. The Maktoums, who have ruled Dubai since 1833, have been known for taking gambles that paid off. The father of the current ruler, for example, built Jebel Ali port and the World Trade Centre office tower in the face of much scepticism from local business.
But the emirate’s aims became no longer confined to a role as a regional centre for the Middle East – its ambition was to serve 2bn people who stretched far into south Asia. In 2004, Sheikh Mohammed famously said that what was then on display in Dubai represented only 10 per cent of his vision. A year earlier, he had been so confident of his plans that he recommended investors pour their money into Dubai instead of depositing it in banks “where it will evaporate like still water”. Dubai, he went on, was delivering an 18 per cent return on investment. “Where else could you find such a rate?” No one who had put money into Dubai, he added, had ever gone bankrupt.
The ambition extended to global markets, where Dubai sought to carve a place for itself through investment vehicles that bought assets including Barneys, the New York retailer, and a 10 per cent stake in MGM Mirage, the casino operator. The government, moreover, treated many of the companies it owned as commercial entities – the argument that is being made to bondholders today regarding Dubai World. But these groups were run by the people closest to Sheikh Mohammed, who were racing to remain in his favour. Over the past few years, much bigger bets were placed. Now, those have proved to big to handle.
Who’s in and who’s out
Mohammed al-Shaibani, director-general of ruler Sheikh Mohammed bin Rashid al-Maktoum’s courtHeads Investment Corporation of Dubai, which has stakes in government companies and oversees both the emirate’s debt and support for state-linked businesses. Following his return from the ruler’s London office to his court in Dubai, once again the prime seat of sheikhly power, he masterminded last year’s anti-corruption campaign.Ahmed al-Tayer, governor of Dubai International Financial CentreAs a member of one of the city’s oldest merchant families, his ascendance could signal a return to a more conservative financial approach. The former finance minister took over at DIFC following a purge of Dubai’s young leaders. Also chairs Emirates NBD after leading the forced merger of Emirates Bank with the National Bank of Dubai. Abdulrahman al-Saleh, director-general of department of financeThe former senior customs executive took over at the department in May and now finds himself tasked with smoothing Dubai’s passage through one of its most severe financial crises.Sultan bin Sulayem, chairman of Dubai World Son of the closest adviser to the ruler’s father, he made his name turning Dubai Ports Authority into a world-beater. Also launched Nakheel, property arm of the state-owned holding company Dubai World, and oversaw construction of one of the emirate’s man-made islands as projects grew more grandiose ahead of last year’s crash. Mohammed al-Gergawi, Dubai Holding chairman and UAE minister of cabinet affairsBecame a close adviser to the ruler a decade ago. Made his name launching the emirate’s internet and media business clusters, then building up Dubai Holding’s interests. Its crisis-hit property and investments arms have been forced to restructure, however, and some senior executives have been investigated over corruption allegations.Mohammed Alabbar, chairman of Emaar PropertiesA leading figure in the property boom of this decade. Revived the emirate’s Asian holdings after a real estate downturn in the late 1980s before setting up the department of economic development in 1992. But his remit is narrower now, focusing on guiding the region’s largest property firm through the crash.
“It’s not the model that was wrong – it’s the execution,” says George Makhoul, former head of Morgan Stanley in the Middle East. “Dubai built a world-class infrastructure but it didn’t know where to stop. And it didn’t have proper practice [needed] to build a business centre, whether in terms of independent management or independent boards. It did not build institutions.”
Even before the global financial crisis struck, it had become clear that the emirate’s finances were spinning out of control, with no centralised authority keeping track of the ballooning debts of state-related entities and little co-ordination, even within the same corporate group. For example, in 2007, Dubai World sought a $2.7bn Islamic bond at the same time as its subsidiary DP World was raising a large loan.
Dubai World eventually closed the deal at $5bn at a significant premium to the prevailing spreads on Dubai corporate debt, which forced Dubai Electricity & Water Authority, another intended borrower, to abandon bond plans the following month. “The left hand didn’t know what the right hand was doing,” says one financial adviser.
It was not until 2008 that state companies were told they needed approval before going out to borrow – a decision, however, that excluded the two flagship companies, Dubai World and Dubai Holding, the ruler-owned company that owns the Jumeirah hospitality chain. Hassan Heikal, head of EFG-Hermes, a regional investment bank, says these two groups account for 60-70 per cent of Dubai’s debt.
Dubai undoubtedly received plenty of encouragement in its borrowing spree. Bankers complain that they entered into loan agreements on a quasi-sovereign guarantee, even if legally there was none – “It was all on a nod and a wink, an oral promise that the Dubai government would back the debt,” says one – but others say that the financial sector too is to blame. “Lots of law firms and banks were keen to get in on these deals and keep Dubai on side during the boom. It was a buyers’ market and everyone was willing to do deals in a way that wouldn’t happen now.”
The frenzied development was, moreover, managed by means of a system short on transparency and accountability. A year-long fraud investigation that has exposed mismanagement in the real estate sector is seen as part of a power struggle pitting Mohammed al-Shaibani, the head of the ruler’s court, against top aides of the sheikh including Sultan bin Sulayem, the head of Dubai World and one of the ruler’s closest friends, with whom he shares a penchant for endurance horse-riding.
The hyperactive Mr Sulayem made his name at the port, building the region’s most efficient transshipment hub, before he expanded into property through Nakheel, a developer, and went on to create a global investment portfolio spanning leisure and real estate assets, much of it leveraged and acquired near the top of the market.
Both Mr Sulayem and Mohammed al-Gergawi, who sits at the helm of Dubai Holding, have lost much of their power. The authority of Mr Shaibani, who had looked after Dubai’s interests in Singapore and London and developed a reputation as a fearless enforcer who fights corruption, has been steadily expanding. “Shaibani is the new kid in town, but lots of people have no exposure to him, can’t reach him: he is guy who works better behind closed doors,” says Abdulkhaleq Abdulla, a professor at Emirates University.
For an emirate that has put so much effort into marketing itself, hiring armies of young public relations executives and building landmark projects such as the sail-shaped Burj al-Arab complex, the past week has been a communications disaster.
The emirate’s credibility has been devastated and its ability to borrow in the short term from banks and international markets has been shattered. The extent of its troubles has yet to be fully revealed and analysts worry about the health of local companies and banks exposed to Dubai World.
Part of the pain, however, will be, as one leading banker says, that Dubai will now need to scale back its ambitions and fall back on its basic business model. “It’s like somebody who becomes obese and has to reduce to 90kg, and that’s the tough part.”
Dubai will also require Abu Dhabi’s help. The current crisis has tested the relationship between two emirates. The UAE central bank, which is bankrolled by Abu Dhabi, had already extended a helping hand earlier this year to a recession-burdened Dubai. Involving Abu Dhabi further, even if it is under the umbrella of federal institutions, carries an implicit price in terms of constraints on Dubai’s political and economic independence.
After a weekend of talks, however, people in the UAE say some clarity is emerging: that Dubai will communicate better with its lenders while Abu Dhabi will support the local economy and provide further assistance to viable businesses in Dubai. It would not, however, step in to rescue companies that it considers to be in effect bankrupt. “On an economic and financial level the federation has shown that it stands by everyone and the central bank is playing a leading role. But the political level is another ball game,” says Prof Abdulla.
Some bankers say that to keep Dubai’s ambitions in check will require more direct Abu Dhabi oversight. “If Abu Dhabi steps in and tries to manage the downsizing then eventually it will work,” says one banker.
Others, however, consider the prospect of more Abu Dhabi involvement unrealistic given the delicate relationship between two emirates that cherish their autonomy – a factor that seasoned observers say investors failed to understand. As one analyst puts it: “These are not efficient relationships; they are wrapped up in political and personal sensitivities.”