Q & A : What next for DubaI?
Q. WHY ARE WORLD MARKETS NOW SO CONCERNED ABOUT DUBAI’S DEBT PROBLEM?
A. European banks are exposed to about half of Dubai’s $80bn (£48.5bn) debt pile. The emirate’s debt moratorium triggered fears that those banks’ bad debts could worsen again, endangering the global recovery. Analysts at Credit Suisse said European banks could face a 5 per cent increase in bad loan provisions next year if they lost 50 per cent on their exposure to Dubai. The top eight foreign banks in the United Arab Emirates by lending volume are HSBC, Standard Chartered, Barclays, Royal Bank of Scotland, Citigroup, BNP Paribas and Credit Agricole’s Calyon. Debt insurance costs in Dubai and neighbouring Qatar, Abu Dhabi and Bahrain shot up yesterday and one bond sale was pulled, in a sign that Dubai’s troubles are affecting the rest of the region.
Q. DUBAI WORLD’S ASSETS ARE BEING SEPARATED – HOW IS THAT GOING TO WORK?
A. Dubai World has brought in restructuring experts to sort out the “good from the bad”. The Dubai Ports asset remains very profitable and may well be separated out and its debts kept current. The idea is to isolate those assets that have no economic future and then assess their value. They may have to be written off altogether and are likely to involve real estate with little prospect of future income streams, even when Dubai and the United Arab Emirates eventually emerge from recession.
Q. WHAT ARE INVESTORS GOING TO DO NEXT?
A. Creditors may have to accept a restructuring of their loans as is now being requested. They will take a longer term view and assess prospects for the underlying restructuring of assets. They may well accept that Dubai has hit a bad patch and the best course of action is to go along with the restructuring efforts as the best way of maintaining value in their assets/loans. The support already provided by the UAE (i.e. Abu Dhabi – the cash rich oil well emirate that is not debt laden) in the purchase of $5bn bonds issued by the government of Dubai demonstrated “intra-sovereign support” among the Emirates.
Q. WHAT ARE THE IMPLICATIONS FOR OTHER SOVEREIGN DEBT MARKETS?
A. Dubai sovereign spreads CDS costs have risen. But it is highly unlikely that Abu Dhabi would allow a “strict sovereign default” from the Dubai government to happen. Expectations are that Dubai will be able to raise money.