Tuesday, November 24, 2009

Dubai starts to pay the piper - heads rolling

In a great tip off from JustCurious, this story in the FT a couple of days ago about the recent replacement of the head of Dubai International Financial Center.

The story* describes, in perhaps as direct a way as could be possible given Simon is based in the UAE, the fallout in the upper levels of Dubai Inc. management following the impact of the recession there.

Dubai have grown increasingly touchy over any negative press as their real estate lead boom, aka Never Never land bubble of hype, was pricked by the liquidity crisis, and their HUGE debts were exposed. The laws recently passed their make it difficult to differentiate fair criticism of whats going on in Dubai or Abu Dhabi from illegality, especially because the whole thing is fundamentally based on confidence that this massive bet the Maktoum family has made will actually be sustainable and pay off. It right now, is very much a confidence .... situation.

Anyone who - even (or especially) with some justification - questions the bets being made, or the economics, or the debt problems, or the resulting governmental and administrative problems, or those crazy insane artificial islands, or the treatment of expatriots or women, or the nature of the financial relationships within the ruling elite of the UAE, can be accused of being an economic traitor to the bubble economy.

For example. Ownership of the Dubai airline Emirates was 'transferred' in Dec 2008 from the Government of Dubai to the Investment Corporation of Dubai (ICD). Rumours have abounded since the big $20bln bond issue that big brother Abu Dhabi (perhaps via the UAE National bank) took an effective 51%-78%-100% (you pick) mortgage, along with other collateral, for underwriting the loan to [not illegal to say in Oman, but in Dubai) technically insolvent Dubai [in hock for ~$85 bln(?) and nowadays a net oil and gas importer remember].

But publically, far as I can tell, the Maktoum family owns it, personally. And of course a handshake agreement, or even the right sort of glance, would probably be enough, if you're Abu Dhabi's ruling family. (Abu Dhabi strill pumps about 2mln barrels a day. Nice. That F1 circuit cost probably less than a week's production). There also seems to be a correlation between Abu Dhabi's control on Dubai's money and increased repression within Dubai of 'loose morality' i.e. scantily dressed Expats and consumption of alcohol...

Photo: from www.wearmeoutkids.com - Made for Dubai?

I'm afraid I was never a fan of the Dubai business model even before the crash, but I'll admit I do enjoy the restaurants and pubs. Meantime, Abu Dhabi have little choice but to support Dubai with their huge SWF and the still robust oil revenues.

As for those readers within the bubble of Dubai, who buy the Maktoum claim that everything's OK, should note that before Abu Dhabi kicked in the $10bln, the market prices for Dubai's Credit Default Swaps*** (a sort of insurance against a loan to Dubai going bad) exceeded those for famously insolvent Iceland, reaching 1,175 'basis points' earlier this year, equivalent to having to pay 11.75% per annum for a 5 year default insurance on Dubai Inc's Sovereign debt...

Dubai ousts financial chief over debt troubles
By Simeon Kerr in Dubai
Published: November 20 2009 20:38 | Last updated: November 20 2009 20:38

Dubai has removed the high-profile governor of the Dubai International Financial Center as a political power struggle caused by the emirate’s financial troubles continues to build.

Omar bin Sulaiman, governor of the centre since 2004, has been replaced by Ahmed al Tayer, a former finance minister. He is chairman of Emirates NBD, Dubai’s largest bank, and a member of one of the merchant families that helped build the foundations of the emirate’s economy.

The US-educated Mr bin Sulaiman appears to be the latest victim of Dubai politics as the emirate seeks to redress the excesses of the supercharged growth from 2003 to 2008 that created an $80bn debt pile and a burst real estate bubble. The ruler’s court, the traditional root of the sheikh’s power base, has assumed increasing powers, including controlling a $20bn (€13.4bn, £12bn) fund that will support cash-strapped state-linked businesses.

The ruler on Thursday also reshuffled the board of the Investment Corporation of Dubai, a government company overseeing the government’s stakes in commercial companies such as Emirates airline.

The ICD board reshuffle has removed three of his lieutenants: Mohammed Gergawi, head of Dubai Holding; Sultan bin Sulayem, head of Dubai World; and Mohammed Alabbar, chairman of Emaar Properties, the government-linked real estate giant.

This triumvirate was instrumental in Dubai’s transition from a regional trading centre to global business hub over the past decade.

The replacement of Mr bin Sulaiman with an old school government official from an established Dubai merchant family could be another signal of a back-to- basics policy.

“This is all about projecting a more conservative image to the bankers, to show that Dubai will be more careful in the future,” said one observer.

Dubai is trying to renegotiate billions of dollars of debt with bankers while also raising the finance needed to meet other obligations, such as the $4bn that becomes due in mid- December on an Islamic bond issued by Nakheel, the government-owned developer that built the city’s Palm Islands.

An anti-corruption campaign against executives who abused their positions of power for personal gain during the real estate boom has recently stepped up a gear.

The authorities are now said to be investigating the bonus culture and real estate holdings of many executives at the state- linked companies that helped propel Dubai to global prominence during the boom.

Yet some local observers are also scratching their heads at the arbitrary nature of the reshuffles, with some executives responsible for ballooning debts and bad investments apparently escaping retribution.

* I've ripped the online segment below (get a blogger option FT!) because, as JC pointed out, its just so nice to be able to run a story on the UAE that is not being reported in the UAE. Bad Dragon, sorry FT and Simon. Please do and register online with the Financial Times immediately readers!

** Credit default swaps, or CDS, are contracts in which a buyer pays a series of payments to a seller, and in exchange receives the right to a payoff if a credit instrument goes into default, or on the occurrence of a specified credit event, for example bankruptcy or restructuring. One basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase signals a deterioration in the perception of credit quality.


  1. Thanks UD for your fantastic analysis and tip off about Emirates changing ownership.

    However it appears unlikely that Abu Dhabi will be able to dictate UAE to change the way they run their little paradise.

    Quote"There also seems to be a correlation between Abu Dhabi's control on Dubai's money and increased repression within Dubai of 'loose morality' i.e. scantily dressed Expats and consumption of alcohol..."

  2. My friends in Dubai have been commenting on increasing lifestyle restrictions ever since Dubai went to Abu Dhabi for a tide-over....

  3. And the fun just keeps on coming. Funny how this link isn't exactly how Gulf News is reporting it...

  4. Here it is in The Daily Mail, complete with photos!


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