It might have been obvious, but it appears not all is well in the United Arab Emirates. Who would have thought a region so dependent on a building boom could be exposed to a slowdown during a global credit squeeze?
The latest bad news is focused on Dubai. In a speech to the Dubai International Financial Centre earlier this week, Mohommed Ali Alabbar, a member of the Dubai Executive Council, revealed the emirate’s sovereign debt amounted to $10bn while the debts of state-affiliated firms amounted to $70bn. Optimistically he added those obligations were manageable because the government of Dubai holds $90bn in assets while state-affiliated companies hold another $260bn. Crisis averted right? Not really.
Alabbar accompanied the statement with the announcement that the federal government would set up a rescue vehicle to inject capital into Emirates Development bank – a merger of two realestate finance companies. The measure aims to reassure investors, spooked by some projections – among them those from Morgan Stanley this summer – that Dubai property prices could fall another 10 per cent by 2010.
Unbelievably, only a week ago, Dubai was celebrating the opening of its latest over-the-top incarnation – the $1bn Atlantis Hotel. The bill for the launch party alone came to a smooth $20m. The irony that it too could sink like Atlantis probably went unnoticed.
As UAE funding problems increase, the measures countering them are at least appearing fast. The latest comes today in the form of a state-supported mortgage provider to plug the credit shortfall in Abu Dhabi, which is suffering on the back of Dubai’s travails. From AP:
DUBAI, United Arab Emirates (AP) — Five state-run and publicly traded companies in Abu Dhabi are launching a new mortgage provider as the credit crunch threatens to stifle the United Arab Emirates’ property boom. The move comes days after the federal government began merging two of the country’s largest mortgage lenders.
The new finance company was announced Wednesday. It’s backed by Abu Dhabi Commercial Bank, Aldar Properties, Mubadala Development, Sorouh Real Estate and the Tourism Development & Investment Co. The UAE is a federation of seven semiautonomous states. Abu Dhabi is the biggest, richest emirate and the national capital. It competes for influence with Dubai, the largest city and site of much of the Gulf’s new property development.
Ali Eid al-Mehairi, chairman of Abu Dhabi Finance, says the new company will focus on alleviating any financing bottlenecks due to the crunch. The question is, will it be able to raise the cash quickly enough? Developers in neighbouring Dubai are reportedly already sidelining or reviewing projects at an alarming rate. Property sales of existing developments are, meanwhile, being held off till markets improve.
UAE markets have unsurprisingly taken a corresponding pounding. Here’s the 12-week performance of the Dubai Financial Market. Its yearly loss at 68 per cent clocks in as the biggest among the world’s 50 biggest equity markets.
But there could be some respite. Standard Chartered is optimistic the measures taken may avert catastrophe. Plus there’s always Dubai’s 20 per cent of GDP surpluses. They write:These surpluses provide the government with adequate financial cushion. In the case of Dubai, debt was accrued mainly in an effort to expand and diversify the economy. The real estate sector has recently slowed down, (as buyers de-leverage) after showing signs of overheating earlier this year due to the availability of cheap credit which resulted in increased speculation. Real estate finance companies are now feeling the pinch of tighter liquidity conditions. The federal government’s bold involvement in the real estate finance sector reassures the market of its commitment in stabilising the sector and should help dampen concerns over Dubai’s debt profile.But the idea Dubai also holds some protection via its diversification away from total oil dependence, is probably too much like wishful thinking. It will help, but only in the longer-term. For now, raising cash today is the priority.
Related link:
Banana emirate – FT Alphaville
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