Will the Dubai Economy Just Collapse During 2010 / 2011

pocketdooz

Abu Dhabi is sitting on a good % of the world's known oil reserves and the world's largest sovereign wealth fund, estimated at between $500 billion and $850 billion depending on what source you use (Moodys say $850 billion as of their latest report). Abu Dhabi is by far the richest and most powerful Emirate of the seven United Arab Emirates.

However, Dubai, the other large Emirate has no meaningful oil reserves and is widely accepted to have between $80 billion and $90 billion of outstanding debt. Just today though, the leading Egyptian investment bank Hermes, released a report detailing how the total debt burden of Dubai is closer to $170 billion.

In the past 10 months, Abu Dhabi has contributed about $15 billion to help Dubai service its huge debt burden. The recent $10 billion 'bail-out bond' allowed Dubai World and Nakheel to refinance debt for 5 years at 4.0% - a rate it would never have gotten in the public capital markets considering its 2 year bonds are yielding about 16.0% currently. Dubai has huge amounts of debt maturities in 2010 and 2011 which cannot be serviced internally. Real estate assets can't be sold to generate cash as there are no buyers and no financing. The country generates little in the way of real value, having built it's economic model on luxury real estate, amusement parks and hospitality. So where will it get the money to repay it's debt? How long will Abu Dhabi continue to bail out it's flashy cousin?

2.2 million people live in Dubai, 83% of whom are foreigners. The population of Dubai has declined by 9% in the past 12 months and the unemployment rate is increasing (but not as quickly as you would expect due in part to the amount of undocumented workers who worked in construction in the recent boom years who are now laid off). Residential property prices have fallen between 40 and 60% since mid-2008 (again, depending on what report you read and the particular development) and almost every major project (The Lagoons, Business Bay, The Palms 2 etc) are either massively scaled back, "indefinitely postponed" or cancelled.

So, will Dubai collapse and if so what effect will it have on the rest of the world's markets?

Over the past 200 years, sovereign debt has proved to be the least favourable debt investment (vs. corporate etc) with country's constantly reneging on their debts (Finland in early 1900's, Germany, Egypt (isn't that how France and England got their hands on it?), Argentina, South East Asia, Iceland and on and on and on.

Is it now Dubai's turn? Any opinions? Does anyone on here have any first hand knowledge they could share?

Thanks.

displaced dub

Right this is well above my pay grade to comment on, but i will try.

From what i see Dubais economy was built on a property filled boom and a service section that is retreating to its own shores all the time.

On the property side its a bit like, say, Bulgaria, where the vast majority of locals can not afford the apartments and homes that have been built. So when Johnny Foreigner gets in the sh*t at home paying his mortgage who does he/or the bank sell it too?? Also when Johnny Foreigner looses his Job in Dubai he leaves taking his spending power with him.... Which is not good for the local economy.

If Dubai goes bang it will spread wide and far, i honestly think it could knock back the fragile global recovery into the stone age.

As i said this is well above my pay grade so all the above is not an educated opinion just a view from reading the news etc.

pocketdooz

All the Petrochemical and Oil investors on this Board and nobody has an opinion on one of the biggest potential events in the Middle East over the next 2 years?

.

ranger4

pocketdooz wrote: »

All the Petrochemical and Oil investors on this Board and nobody has an opinion on one of the biggest potential events in the Middle East over the next 2 years?

.

I feel greece could pose more of a iminent problem to fragile economy unless bailed out by IMF, Germany-france doint intend to give funding to greece as this could see other pigs seeking funding.

displaced dub

Thought this might interest you PD seems like Dubai has it's head burried in the sand

Feb. 1 (Bloomberg) -- Dubai Airports, the government-owned airfield operator, plans to seek approval for expansion plans costing “billions of dirham,” undeterred by the emirate’s need for a $20 billion bailout last year.

The company will make a recommendation on boosting capacity within the next few months, Chief Executive Officer Paul Griffiths said today in an interview in Singapore. He declined to elaborate further on the costs.

Dubai plans to press ahead with expanding its current airport and building a new one, even after having to get help from neighbor Abu Dhabi to pay off debts used to finance real- estate projects. Aviation generates as much as 25 percent of the emirate’s economy, according to Griffiths, as Dubai has invested in facilities and Emirates Airline to make up for a lack of oil reserves.

“Dubai’s vision, attitude towards airport infrastructure is that if you constrain, the growth will go elsewhere,” he said. “So we are not going to constrain that growth.”

Dubai International Airport, the 17th-biggest worldwide in terms of passengers, handled 40.9 million travelers last year, a 9.2 percent increase. The airport operator expects passenger numbers to rise 14 percent this year to 46 million.

The airport’s capacity is due to rise to 75 million passengers a year in 2012 from 60 million now. That will be followed by an increase to as much as 97 million, Griffiths said.

New Airport

Some 40 kilometers (25 miles) away, the emirate is also building the Al Maktoum Airport, which will eventually have a capacity of 120 million passengers. Dubai pushed back the opening of the first phase of the airport to this year because of construction delays. The new airport will cost $33 billion, Griffiths has said.

“Recognizing that the airports are a critical part of the economy here, it seems to me the capacity of the airports and expansions already announced would satisfy Dubai’s needs for the foreseeable future,” said Nicholas Maclean, managing director of CB Richard Ellis Middle East.

“Unless it comes as a partnership with said Abu Dhabi, it seems to be a very ambitious plan and we’d need to see the plans and understand more about how they intend to fund” any new infrastructure plans, Maclean said.

Dubai and its state-owned companies borrowed at least $80 billion through 2008 to transform the emirate into a tourism and financial hub. The seizure of debt markets after the onset of the global credit crisis led to a 50 percent decline in property prices in the city and hampered the ability of Dubai-based companies to raise new loans to refinance maturing debt.

Tourism Push

Dubai, the second-biggest of seven states that make up the U.A.E., has geared itself to host as many as 15 million tourists annually by 2015, according to government estimates. It built islands in the shape of palms, the world’s tallest tower and a ski slope inside a shopping mall in hope to lure travelers from around the world.

The Dubai Shopping Festival, which kicked off this week, seeks to position the emirate among the world’s leading retail destinations. Dubai Duty Free said on Jan. 4 it made a record $1.1 billion in sales last year, or 5 percent of all airport retail sales worldwide

heno55

i cant see the other emirates letting Dubai go under as it would probably lead to other emirates that havnt got Abu Dabi's oil reserves following suit, another thing to factor in is arab pride they will continue to prop up Dubai long after it ceases to make sense just to prevent a failed arab state/country/emirate.just my own opinion and not based on any deep insight exept for a small knowledge of how the arab mind works

displaced dub

Bloomberg News, sent from my iPhone.
Dubai Bailout Rally Evaporates on Standstill Silence

Feb. 1 (Bloomberg) -- Dubai’s failure to reassure investors its restructuring plan will succeed is causing the emirate’s benchmark stock index to drop the most in the world and forcing companies to scrap bond sales.

The Dubai Financial Market General Index lost 13 percent since Dec. 14, wiping out a rally sparked by Abu Dhabi’s bailout of Dubai World that day. Bonds of the state-owned company’s property developer Nakheel PJSC sank to 56 cents on the dollar from 67.5 cents, while credit default swaps on Dubai government debt trade at 491.5 basis points, near the highest level since Abu Dhabi’s fund injection.

Dubai World, in talks to reschedule $22 billion of debt, failed to present an offer in a meeting with lenders in December and declined to say when a deal may be struck. Dubai Electricity & Water Authority said Jan. 17 it delayed a $1.5 billion bond sale as borrowing costs were too high.

Lack of clarity on Dubai World’s restructuring plan “is creating uncertainty that is weighing heavily on the market,” said Rami Sidani, the Dubai-based head of Middle East and North Africa investment at Schroder Investment Management Ltd., which oversees about $230 billion worldwide. “We’re not out of the woods yet and we know Dubai will continue to struggle with a debt burden.”

Real-Estate Crash

Dubai stocks and bonds tumbled in November after the government said Dubai World would seek to delay payments to creditors until at least May 30. Investors speculated that Nakheel, which is building palm tree-shaped islands off the emirate’s coast, would default after Dubai companies lost access to cheap financing because of the global credit crunch and a 50 percent slump in Dubai home prices.

Abu Dhabi’s $10 billion bailout on Dec. 14 ensured that Nakheel would have the $4.1 billion it needed to repay an Islamic bond due that day. Dubai is the second-biggest of seven states that make up the United Arab Emirates, whose capital Abu Dhabi holds 8 percent of global oil reserves. Dubai and its state-owned companies borrowed at least $80 billion until 2008 to transform the emirate into a tourism and financial hub.

The Dubai stock index jumped 10 percent and bond prices soared on the day Abu Dhabi provided the funds. Dubai credit default swaps, which measure the cost of protecting against the default of government debt, sank to 430 basis points from 540.

Biggest Decline

The Dubai stock index has since posted the biggest decline among benchmark equity gauges in the world’s 70 largest markets. While global stocks have retreated on concern China will take steps to curb economic growth, the Dubai measure’s 13 percent loss compares with a 4.3 percent decline in the MSCI AC World Index.

Nakheel’s $750 million of 2.75 percent bonds due 2011 lost about 17 percent during the period, according to Citigroup Inc. prices on Bloomberg, while credit default swaps jumped 61.5 basis points. A basis point on a credit-default swap contract to protect against the default of $10 million of debt for five years is equivalent to $1,000 a year.

The Dubai stock index climbed 2.2 percent to close at 1,624.75 today, while the Nakheel 2011 bonds gained to 56 cents from 55.75 cents on Jan. 29. Dubai credit default swaps fell 1.5 basis points to 491.5, according to CMA DataVision prices.

“The Dubai World restructuring is going to be a long and tedious process,” said Shehab Gargash, a managing director at Dubai-based Daman Investments who’s holding half of his $1.5 billion under management in cash. “That’s the main reason we decided to stay out” of Dubai’s “bear market rally,” he said.

Worst Is Over

Templeton Asset Management Ltd.’s Mark Mobius says the Abu Dhabi bailout ensured the worst of the emirate’s debt crisis is over. The manager of $34 billion in emerging market assets said in an interview there’s “value and opportunity” in Dubai markets and that Templeton bought shares during the selloff in November and early December.

“There has to be more revelations about what is being done and how, but the panic is over,” Mobius, the chairman of Templeton Asset Management, said in the Jan. 28 interview in Melbourne. “We are trying to buy at a good price given the fact that transparency isn’t complete.”

The Dubai stock index trades for 5.2 times analysts’ 2010 earnings estimates, the cheapest level worldwide after Nigeria’s All Share Index, according to data compiled by Bloomberg.

While investors speculate on the recovery values of Dubai debt, the lifeline from Abu Dhabi is helping the state-owned companies meet their interest payments. Nakheel paid a $10.3 million coupon last month on its 2011 bond. Dubai Holding Commercial Operations Group LLC, the investment company owned by Dubai’s ruler, made about $100 million of scheduled payments in January on three bonds.

Refinancing Needs

Dubai-based firms have to refinance $7.3 billion in syndicated loans and $2.8 billion in maturing bonds this year, according to Deutsche Bank AG estimates. Some of the biggest debt maturities include a $1.25 billion loan due in June by Dubai International Capital LLC, an investment company owned by Dubai’s ruler, and $1.5 billion in two floating-rate dollar notes issued by Emirates NBD PJSC.

Emirates Telecommunications Corp., the U.A.E.’s biggest phone company, has deferred plans to issue the equivalent of $490 million in bonds as it has enough cash for expansion plans, Ahmed bin Ali, a spokesman for the company, said Jan. 28.

IPOs Dry Up

The Dubai government’s $1.93 billion Islamic bond issued in October was the last sale of bonds from the emirate. Drake & Scull International PJSC, a Dubai-based construction-engineering contractor that raised about 1.2 billion dirhams ($327 million) from its initial public offering in 2008, was the last stock sale from a Dubai-based company, according to Bloomberg data.

“It makes very little sense for a Dubai corporate issuer to go out now and just try to force the issue in the market,” said Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd. “Right now the market is waiting for a strategy. How are we going to reduce the absolute debt level in Dubai and how quickly is this going to happen. Investors are taking a very conservative attitude toward the U.A.E.”