Don’t wave Dubai bye yet
Dubai’s reputation has ended the year in tatters, but there’s no need to wave Dubai-bye quite yet. Abu Dhabi, the capital of the United Arab Emirates and the source of rescue loans for its neighbor, has good reasons to keep Dubai on life-support.
The bailout has already been costly for Abu Dhabi. Over the course of 2009, institutions based there have committed $25 billion to Dubai in subordinated loans which yield only 4 percent. Of course, Abu Dhabi, which has a sovereign wealth fund widely thought to be worth $600 billion, can easily find the money.
Still, many investors assume that Dubai will ultimately have to pay much more in return for support from its richer fellow emirate. One common theory doing the rounds in the Gulf is that Abu Dhabi will wind up with Dubai’s crown jewels, such as the Emirates airline.
But such aggression would not serve Abu Dhabi well. An asset grab might fracture the UAE, creating economically damaging political instability. Harsh moves might also scare foreigners. They will be needed to make Abu Dhabi’s own international financial center, under construction and due to be completed in 2013, a success.
Abu Dhabi has a clear desire to ultimately supplant Dubai as the financial capital of the UAE if not the Gulf, and eventually take a leading role in the region. But for now it lacks the basic infrastructure. It would be self-destructive for Abu Dhabi to take Dubai off life support before it can offer a plausible alternative.
While waiting, Abu Dhabi will want to maintain some sort of financial order in Dubai. That consideration partly helps explain the decision to keep Dubai developer Nakheel from defaulting to one set of bondholders, even though a real estate recovery next year is improbable.
The delicate inter-emirate politics should keep selected financial support flowing to Dubai through 2010. Other creditors to troubled government-related entities could get all their money back, or at least manage to extract a sovereign guarantee for commercial debts from the UAE as part of a negotiated restructuring process. Ensuring Dubai stays on it feet will be vital for Abu Dhabi to achieve its long-term ambition.