A. Dubai is part of the United Arab Emirates, seven city-states which have separate ruling families, separate budgets, but security, immigration and foreign policies in common. Abu Dhabi has nearly all the UAE's oil. To keep up, Dubai from the 1950s on diversified its economy into ports, trade, services and finance, largely successfully. But its liquidity-fuelled real estate and tourism binge in the last decade may have been one step too far.
A. The emirate has said it has $80bn of debts, though some analysts say the true figure could be double that. Dubai World, the state-owned holding company whose bail-out plans triggered the current crisis, has liabilities of about $60bn, though only part of that is debt. The main problem is its real estate subsidiary Nakheel, which has huge bonds coming due, including an Islamic bond for $3.5bn in December. It appears to have little cash flow to meet payments - as well as relying on debt, it also sold most developments off-plan, with new developments now on hold.
Q. The big market crash after Lehman Brothers folded
was more than a year ago. Why has Dubai only just been hit?
A. The property crash hit Dubai at the time - house prices
fell 50 pc in six months. Nakheel was known to be in
trouble. But investors assumed that as a state-owned company
it would not default on its debt. The government refused to
issue detailed statements of how it was to handle Dubai
World's debt problems, and rounded on those who said that
the crash had undermined Dubai's development model.
This encouraged a belief that a rescue package was already
in place, probably funded by Abu Dhabi. The statement on
Wednesday that the government was asking for a six-month
standstill on repayments implied the rescue was in doubt.
Q. Why hasn't Abu Dhabi come to Dubai's aid? It has the
world's largest sovereign wealth fund.
A. Abu Dhabi has, via the federal central bank, bought one
$10bn bond issued by the Dubai government earlier this year,
and, via its own banks, bought another $5bn bond this week.
But the latter came with a rider that it was not to be used
for the Dubai World bail-out. This raises two questions:
what are the other debts for which it is to be used? And how
is the Dubai World debt to be met, even after the six-month
delay, if Abu Dhabi will not fund the rescue package?
Q. What about other Dubai companies? How are they doing?
A. Dubai World owns DP World, the successful ports operator
which bought P&O. Other arms of the Dubai government, and
the ruling family's directly owned holding companies, also
own successful companies such as Emirates Airlines and
Jumeirah Hotels, as well as stakes in buildings and
businesses around the world, including the London Stock
Exchange. But the emirate's lack of transparency and
relatively untested financial legal system means that no-one
knows if these can be demanded as collateral against Dubai
World and other government debts.
Q. Nevertheless, exposure of western banks to the debt
seems quite small compared to the trillions of dollars to
which we have become accustomed. Why the panic?
A. At the most basic level, fears that exposed banks will
have to write down losses, and that both Dubai and
Abu Dhabi may have to sell worldwide assets, has hit
prices everywhere. At an "animal spirits" level, the
disclosure of significant unforeseen problems in Dubai has
refocused attention on where else might have hidden "black
holes". The health of sovereign debt worldwide, already seen
as the major financial issue for the next decade, is also
being reexamined.
Q. Can Dubai survive?
A. Dubai is still seen as the premier place to do
business in the Middle East and beyond. It is a preferred
base for not just Arab but Pakistani, Iranian and even
Indian businesses, due to the wider region's political
uncertainty. Its reputation for liberal attitudes helps. But
events this week have damaged its reputation for economic
competence, which the emirate's rulers will now have to work
hard to restore.
Source: http://www.telegraph.co.uk