I’ve always loved being in the newsroom when news broke, watching the reporters and editors mobilize and come up with a story plan in just a few minutes. In the UAE, even though we’ve had quite a bit happening as far as how the economic downturn has affected businesses here, the news is largely managed and not that many bombs go off. Or authorities simply don’t comment on issues and it becomes difficult to write about.
Well, last Wednesday just as we were getting ready to start the Eid/National Day weeklong holiday, a bonafide news bomb burst. Dubai World, the quasi-government company that has been behind much of Dubai’s high profile real estate projects — the man-made islands of the Palm and the World are probably the best known — announced it was seeking a six-month “standstill” on its nearly $60 billion in debt, i.e., it might want to not pay its bills until May 30.
This came just a few weeks after Sheihk Mohammed bin Rashid al-Maktoum, Dubai’s hereditary ruler, broke away from speaking Arabic at a press conference to tell critics to “shut up” about rumors of a rift between Abu Dhabi, where the oil wealth is concentrated, and Dubai, which has been hurt by the real estate crash and credit crunch. That helped ease fears over whether Dubai could make a multi-billion payment due next month, and in fact, the emirate’s sukuk bonds were trading at a 10 per cent premium until Wednesday.
This is how the Associated Press reported on it Thursday: “DUBAI, United Arab Emirates – Just a year after the global downturn derailed Dubai’s explosive growth, the city is now so swamped in debt that it’s asking for a six-month reprieve on paying its bills — causing a drop on world markets Thursday and raising questions about Dubai’s reputation as a magnet for international investment.”
Bloomberg picked up a BofA report that wondered about ripple effects: “’One cannot rule out — as a tail risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,’ Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.”
The NYT had an interesting wrap of the last few days’ events and possible consequences: “Now that the boom has gone bust, both in Dubai and in the United States, Dubai is stuck with a glut of real estate that no one wants to buy or rent. Creditors and markets had always assumed that when push came to shove, its oil-rich neighbor Abu Dhabi would bail out Dubai. But that assumption was called into question this week, and the resulting fear that Dubai might not be able to pay its bills sent a wave of uncertainty rippling through markets just as investors thought the worst of the global financial instability was over.”
One of The National’s writers, Frank Kane, says the announcement is just part of Dubai’s maturity on the economic world stage: “How Dubai comes out of those negotiations, and how far it is successful in laying the foundations for a secure future as a diversified economy, will be the real measure of its development as a financial centre. If it can play hardball with the blue-bloods of western banking, and come out with a satisfactory deal, Dubai will truly have come of age.”
Markets in the Gulf have been closed for Eid; US markets reopen Monday. It will be interesting to see how traders react once they had a few days to digest the news. For all the talk of green shoots, it seems that the global economy is still battling a credit crunch-induced hangover.