The Dubai mess

By Felix Salmon
January 12, 2010
Paul Whitfield and Vipal Monga explain that nothing really has been cleared up at all, and that there are far more -- and far bigger -- uncertainties surrounding the emirate's finances than most of us had suspected.

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If you think that the Dubai situation has pretty much been resolved with that cash infusion from Abu Dhabi, think again. Paul Whitfield and Vipal Monga explain that nothing really has been cleared up at all, and that there are far more — and far bigger — uncertainties surrounding the emirate’s finances than most of us had suspected.

For one thing, Dubai has no real legal structure capable of dealing with a default on this level, which has forced it to hurriedly import a jury-rigged system with UK and Singaporean jurists, based on British and American (not Islamic) legal structures.

But it’s not clear how trustworthy the Dubai’s government — its ruling family — really is, given that they actively encouraged the idea that Dubai World had a sovereign guarantee.

And it’s also far from clear what has happened to the $10 billion received from Abu Dhabi in February, or, for that matter, another $5 billion that was lent to Dubai by two Abu Dhabi banks in November. As for the further $10 billion which arrived in December, we know that $4.1 billion of it was used to repay Dubai World’s sukuk. But the final destination of the remainder of the money is also opaque.

What’s more, no one has much of a handle on the total liabilities involved, either:

Dubai World has officially released a $59.3 billion debt figure as of the end of 2008, but that number isn’t taken at face value by financial experts.

Deutsche Bank AG, for example, says that the figure included more than just financial debt, including equity, and payments due to suppliers. Discounting the nonfinancial debt led the German bank to estimate Dubai World’s financial external debt at $24.27 billion.

Morgan Stanley has its own estimate of the liabilities, taking a disclosed $26.2 billion number from Dubai and then adding another 30% to that to account for a presumed undisclosed amount, putting Dubai World’s debt at a seemingly arbitrary $34.1 billion.

The upshot is that the restructuring is going to be messy and unpredictable: my guess is that it’ll be a highly political process which will drag on for years. As ever, the big winners are certain to be the lawyers.


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I agree that the Dubai World restructuring and bailout from Abu Dhabi has been handled poorly. It is becoming de rigeur for the solution to be an extra-judicial tribunal (see, e.g., Amlak and Tamweel, two Islamic mortgage companies the government wants to merge which now has its own judicial panel: article?AID=/20100112/BUSINESS/701129960  /1005).

It is true that we don’t know where the bailoout money has gone save for the $4.1 billion used to pay off sukuk certificate holders of Nakheel and now a portion of that money is being used to make payments to Nakheel’s other sukuk certificate holders ( 0/1/Pages/12012010/01132010_246d1d5fff12 4080aa5e7f4e00447c8a.aspx).

Without a functioning system for dealing with defaulting or restructuring government-related entities, Dubai will have trouble getting investor confidence back. The problems are only just beginning as well with the standstill agreement not yet agreed upon but anticipated soon.

–Blake Goud

Posted by blakegoud | Report as abusive

The Nakheel uncertainty continues with Barclay’s Capital saying that sukuk certificateholders should sell their holdings because they anticipate only 40 or 50 cents non the dollar will be recovered in the restructuring. article?AID=/20100112/BUSINESS/701129928  /1005

Posted by blakegoud | Report as abusive

Thank you for giving the chance to the regular readers to express their opinion.
The above article is not showing the required knowledge about the prevaling situation in Dubai.
With all do respect for the highly profile of the author, is nothing else then speculation and the way to divert the public opinion from their own problems to Dubai.
Without any kind of skin complexes allow to ask you aa few questions:-
1. Is this a kind of adgenda against non western countries?
2. The problems in so called developed countries are not much huge then in Dubai?
3. I think the process of Dubai recovering is started already and beside internal support, Dubai will be remain as a major business hub for African and Asian Subcontinet countries, fact which is going to acelerate the reconvering.
4.Of course it will be a huge correction over rall in all transactions, but this correction is not only in Dubai.
5. Let’s speak a litle more about the ten world countries which are holding the major external debts, like USA, UNITED KINGDOM, FRANCE, GERMANY, BELGIUM, JAPAN, ETC. What’s is the side effect of the situation in this countries to the so called countries?

Posted by OYACOB | Report as abusive

Dubai has no real revenue generation base like Abu Dhabi. Its reliance on property and banking sectors proved to be fragile and far fetched. Now the government is turning inwards for revenue generation, taking steps like fixing Dhs10 minimum fare for Taxis (which are, incidentally, most expensive in the UAE), using e-tickets and e-card to nick consumers and even charging Dhs 100 per head to visit the top floor of Burj Khalifa. Dubai should relax its policies to invite more businesses, especially self-employed and startups so as to create more jobs. Also, the process of Emiratization should be deferred so as to retain the expat community who have actually built the Emirate.

Posted by kashaziz | Report as abusive

Dubai had made a major blunders by relying only on its real estate and tourism industry and if it had concentrated on other sectors of economy as well like Abu Dhabi then it could have survived bad times from which it is going through right now.

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