Abu Dhabi: A long way down
Wednesday, 22 October 2008
Roula Khalaf and Lionel Barber
FROM volley to vertigo? Roger Federer and Andre Agassi play atop the helipad that perches most of the way up Dubai's 321 metre high Burj Al Arab hotel. A property boom has brought worries about debt levels in the emirate
It was early evening on October 11 that was Saturday when senior officials in Abu Dhabi, the oil-rich capital of the United Arab Emirates, huddled with Crown Prince Mohammed bin Zayed al-Nahyan to discuss how to respond to the global financial turmoil.
For weeks they had watched the Wall Street crisis unfold, devastating the US financial sector and contaminating others around the world. The early assumption that the UAE and its Gulf peers, basking in oil-fuelled liquidity, would be impervious to the storm was looking increasingly doubtful.
The financial crisis had claimed no casualties in the UAE. But as much as Dh200bn ($54bn, £31bn, euro40bn) of foreign deposits had fled the system and rumours were circulating that at least one institution in Dubai, the federation's strutting business hub, was in trouble.
Across the Gulf, equity markets were in free fall as foreigners pulled out; interbank lending was drying up, most acutely in the UAE; and investors, both state and private, were seeing the value of international equity holdings plummet. As oil prices, the main driver of the Gulf boom, slid sharply towards $70 a barrel, Dubai's high levels of debt reinforced concerns over the bubble forming in its property market. Local bankers were becoming anxious.
Even so, the UAE could draw on deep wells of confidence. It was a survivor, a federation that had defied wars and political instability in the region to forge ahead with development. Its economy rated as one of the most dynamic in the world over the past decade, in spite of the US invasion of Iraq, the threat of religious extremism and international tensions over Iran's nuclear programme.
Rulers such as the Abu Dhabi crown prince and Dubai's Sheikh Mohammed bin Rashid al-Maktoum have long seen themselves as the architects of a new - if still undemocratic - Middle East, spending tens of billions of dollars on new towers, ports, hotels and residential compounds. But their ambition is wider: to create a solid and diversified economic base that limits the reliance on oil, as well as a more educated society that acts as a model for the Arab world.
But this financial meltdown was of a different scale to previous crises, while the rapid economic growth that had integrated the UAE into the global economy had also made it more vulnerable to international financial shocks. Now, with business confidence eroding and no one knowing the direction of the "tsunami", as one Abu Dhabi official called it, waiting for it to strike the Middle East was no longer an option.
The Abu Dhabi meeting, originally scheduled for October 12 (Sunday), was brought forward by a day. For three hours, the group of top policymakers debated various options for action, including whether state funds should be used to intervene in equity markets or whether the government should force consolidation in the banking sector. There was, crucially, close consultation with Dubai, whose powerful ruler is also the UAE's prime minister.
Consensus is a complicated matter in the UAE, where emirates enjoy much autonomy and sometimes engage in fierce rivalry. It is not unusual in Abu Dhabi to hear criticism of Dubai's brash development and its financial and social consequences, along with warnings that the sister emirate should be reined in. In the days preceding the meeting, bankers in Dubai had worried that the city-state might be left to fend for itself. But agreement emerged that night on the need for a blanket guarantee on deposits in all local banks (later extended to UAE-based foreign banks), as well as for direct injections of capital into various institutions.
The final decision was in the hands of Sheikh Khalifa bin Zayed al-Nahyan, president of the UAE federation. By morning, the actions were approved by the cabinet and made public, sending a clear message of preventive action. Most importantly, they signalled that Abu Dhabi (which owns more than 90 per cent of the UAE's oil reserves) and the federal government would stand by Dubai.
"These were federal decisions, made at the very top between the president, the prime minister and the cabinet. They were very important, quick decisions, with clear vision and they were executed very fast," says Omar bin Suleiman, head of the Dubai International Financial Centre and vice-chairman of the UAE central bank. "Now, global sources of funding are limited, so it's a time to bring out money when needed. Cash is king."
The UAE moves were not the only interventions in the Gulf this month. Qatar announced that its sovereign wealth fund would take 10-20 per cent stakes in local banks so they could continue to fund infrastructure projects. Saudi Arabia set up an emergency facility for banks and lowered interest rates. Earlier this month, Kuwait's sovereign wealth fund was used by the government to inject liquidity into the local stock market.
Only a few months ago, western markets looked to the fast-growing capitals of the Gulf as a safe haven, a source of capital as well as of high-paying financial jobs. The Kuwait Investment Authority was among state funds that invested in Citigroup in January (by September it had shown a $270m loss on the holding). Foreign assets of Gulf Co-operation Council states - the UAE, Saudi Arabia, Kuwait, Oman, Qatar and Bahrain - were more than $1,000bn last year and 2007 oil revenues topped $400bn. Projects planned or under way were estimated at $2,500bn.
But financing costs were rocketing (project finance loan prices have gone from 50 basis points above the London interbank offered rate to at least 250bp above Libor) and a global recession loomed. The days of lavish spending and easy money were over.
"The drop in oil prices and the realisation that the world was on the cusp of a global recession has cooled 'animal spirits'," says Anais Faraj, a Dubai-based banker. "It has sapped demand for [real] estate ventures and demolished the over-optimistic growth projections that had been bandied about."
True, economies in the region - particularly Saudi Arabia, Abu Dhabi and Qatar - remain well positioned to confront the financial storm.
They can draw on vast savings to complete many of the projects planned. In the middle of this month, Credit Suisse raised money from a group that included the Qatar Investment Authority. But governments will have to be more selective and more disciplined. "It's the end of the 'extra' boom and the double-digit [nominal GDP] growth rates," says Henry Azzam, chief executive for the Middle East and North Africa at Deutsche Bank.
He points out, however, that the Gulf economic expansion started a few years ago when oil was at $40 a barrel - and that most Gulf government budgets are still based on an oil price only slightly higher. "If oil stays above $40, the region will be OK," adds Mr Azzam, citing a high level of confidence particularly in Saudi Arabia, the largest and most risk-averse regional economy.
But while a soft landing is predicted for much of the Gulf, the biggest risk is in ambitious Dubai. With little oil wealth of its own, Dubai has relied on debt in order to finance its diversification. Estimates this month by Moody's Investors Service, the rating agency, say government-backed Dubai companies' leverage has risen close to $50bn, exceeding 2006 gross domestic product.
Debt levels, the agency adds, will continue to rise, and the emirate may have to seek support from Abu Dhabi or the federal government to finance its expansion.
One test of Dubai's financial stability will be its ability to refinance debt. According to Merrill Lynch, Borse Dubai, which consolidates the Dubai government's two stock exchanges and investments in other exchanges, and Dubai World, the government-owned company that last year bought 10 per cent of MGM Mirage, the US gaming and resorts group, have $5.8bn and $5.0bn respectively in foreign currency loans to repay in 2008 and early 2009.
Merrill plays down the risk of a Dubai default but some bankers there say the emirate may have to sell assets, perhaps to some of its wealthier neighbours, to meet its obligations.
The global crisis has coincided with growing concern about Dubai's property market, with analysts questioning whether demand from expatriates moving in will match the supply of units coming on to the market. While the total exposure of the Dubai banking system to property is only 17 per cent, analysts say the percentage is higher for some of the smaller banks, making them vulnerable to a downturn.
Among Dubai officials, the mood remains confident. Many insist that there is still no end to the city's ambitions. They point out that Dubai has a record of taking bold steps when everyone else is retrenching. Dubai's Emirates airlines placed the industry's largest ever airline order just after the September 11 attacks on the US in 2001.
Indeed, government-backed companies have continued to unveil projects including, most recently, a kilometre-high skyscraper. When asked how Dubai's vision will continue to be financed, officials shrug and insist that credit remains available.
Analysts and bankers in Dubai, however, say that while top government officials need to maintain public confidence, the emirate will have to scale back its ambitions. "They have to continue saying that it's all OK - this is what the country is built on and they cannot give an inkling of doubt," says a Dubai banker.
But for all the hubris shown by the emirate, says one official in Abu Dhabi, "Dubai will have to adjust and realise that the world is not the same."
Additional reporting by Simeon Kerr in Dubai and Andrew England in Abu Dhabi. Under syndication arrangement with the FE
FROM volley to vertigo? Roger Federer and Andre Agassi play atop the helipad that perches most of the way up Dubai's 321 metre high Burj Al Arab hotel. A property boom has brought worries about debt levels in the emirate
It was early evening on October 11 that was Saturday when senior officials in Abu Dhabi, the oil-rich capital of the United Arab Emirates, huddled with Crown Prince Mohammed bin Zayed al-Nahyan to discuss how to respond to the global financial turmoil.
For weeks they had watched the Wall Street crisis unfold, devastating the US financial sector and contaminating others around the world. The early assumption that the UAE and its Gulf peers, basking in oil-fuelled liquidity, would be impervious to the storm was looking increasingly doubtful.
The financial crisis had claimed no casualties in the UAE. But as much as Dh200bn ($54bn, £31bn, euro40bn) of foreign deposits had fled the system and rumours were circulating that at least one institution in Dubai, the federation's strutting business hub, was in trouble.
Across the Gulf, equity markets were in free fall as foreigners pulled out; interbank lending was drying up, most acutely in the UAE; and investors, both state and private, were seeing the value of international equity holdings plummet. As oil prices, the main driver of the Gulf boom, slid sharply towards $70 a barrel, Dubai's high levels of debt reinforced concerns over the bubble forming in its property market. Local bankers were becoming anxious.
Even so, the UAE could draw on deep wells of confidence. It was a survivor, a federation that had defied wars and political instability in the region to forge ahead with development. Its economy rated as one of the most dynamic in the world over the past decade, in spite of the US invasion of Iraq, the threat of religious extremism and international tensions over Iran's nuclear programme.
Rulers such as the Abu Dhabi crown prince and Dubai's Sheikh Mohammed bin Rashid al-Maktoum have long seen themselves as the architects of a new - if still undemocratic - Middle East, spending tens of billions of dollars on new towers, ports, hotels and residential compounds. But their ambition is wider: to create a solid and diversified economic base that limits the reliance on oil, as well as a more educated society that acts as a model for the Arab world.
But this financial meltdown was of a different scale to previous crises, while the rapid economic growth that had integrated the UAE into the global economy had also made it more vulnerable to international financial shocks. Now, with business confidence eroding and no one knowing the direction of the "tsunami", as one Abu Dhabi official called it, waiting for it to strike the Middle East was no longer an option.
The Abu Dhabi meeting, originally scheduled for October 12 (Sunday), was brought forward by a day. For three hours, the group of top policymakers debated various options for action, including whether state funds should be used to intervene in equity markets or whether the government should force consolidation in the banking sector. There was, crucially, close consultation with Dubai, whose powerful ruler is also the UAE's prime minister.
Consensus is a complicated matter in the UAE, where emirates enjoy much autonomy and sometimes engage in fierce rivalry. It is not unusual in Abu Dhabi to hear criticism of Dubai's brash development and its financial and social consequences, along with warnings that the sister emirate should be reined in. In the days preceding the meeting, bankers in Dubai had worried that the city-state might be left to fend for itself. But agreement emerged that night on the need for a blanket guarantee on deposits in all local banks (later extended to UAE-based foreign banks), as well as for direct injections of capital into various institutions.
The final decision was in the hands of Sheikh Khalifa bin Zayed al-Nahyan, president of the UAE federation. By morning, the actions were approved by the cabinet and made public, sending a clear message of preventive action. Most importantly, they signalled that Abu Dhabi (which owns more than 90 per cent of the UAE's oil reserves) and the federal government would stand by Dubai.
"These were federal decisions, made at the very top between the president, the prime minister and the cabinet. They were very important, quick decisions, with clear vision and they were executed very fast," says Omar bin Suleiman, head of the Dubai International Financial Centre and vice-chairman of the UAE central bank. "Now, global sources of funding are limited, so it's a time to bring out money when needed. Cash is king."
The UAE moves were not the only interventions in the Gulf this month. Qatar announced that its sovereign wealth fund would take 10-20 per cent stakes in local banks so they could continue to fund infrastructure projects. Saudi Arabia set up an emergency facility for banks and lowered interest rates. Earlier this month, Kuwait's sovereign wealth fund was used by the government to inject liquidity into the local stock market.
Only a few months ago, western markets looked to the fast-growing capitals of the Gulf as a safe haven, a source of capital as well as of high-paying financial jobs. The Kuwait Investment Authority was among state funds that invested in Citigroup in January (by September it had shown a $270m loss on the holding). Foreign assets of Gulf Co-operation Council states - the UAE, Saudi Arabia, Kuwait, Oman, Qatar and Bahrain - were more than $1,000bn last year and 2007 oil revenues topped $400bn. Projects planned or under way were estimated at $2,500bn.
But financing costs were rocketing (project finance loan prices have gone from 50 basis points above the London interbank offered rate to at least 250bp above Libor) and a global recession loomed. The days of lavish spending and easy money were over.
"The drop in oil prices and the realisation that the world was on the cusp of a global recession has cooled 'animal spirits'," says Anais Faraj, a Dubai-based banker. "It has sapped demand for [real] estate ventures and demolished the over-optimistic growth projections that had been bandied about."
True, economies in the region - particularly Saudi Arabia, Abu Dhabi and Qatar - remain well positioned to confront the financial storm.
They can draw on vast savings to complete many of the projects planned. In the middle of this month, Credit Suisse raised money from a group that included the Qatar Investment Authority. But governments will have to be more selective and more disciplined. "It's the end of the 'extra' boom and the double-digit [nominal GDP] growth rates," says Henry Azzam, chief executive for the Middle East and North Africa at Deutsche Bank.
He points out, however, that the Gulf economic expansion started a few years ago when oil was at $40 a barrel - and that most Gulf government budgets are still based on an oil price only slightly higher. "If oil stays above $40, the region will be OK," adds Mr Azzam, citing a high level of confidence particularly in Saudi Arabia, the largest and most risk-averse regional economy.
But while a soft landing is predicted for much of the Gulf, the biggest risk is in ambitious Dubai. With little oil wealth of its own, Dubai has relied on debt in order to finance its diversification. Estimates this month by Moody's Investors Service, the rating agency, say government-backed Dubai companies' leverage has risen close to $50bn, exceeding 2006 gross domestic product.
Debt levels, the agency adds, will continue to rise, and the emirate may have to seek support from Abu Dhabi or the federal government to finance its expansion.
One test of Dubai's financial stability will be its ability to refinance debt. According to Merrill Lynch, Borse Dubai, which consolidates the Dubai government's two stock exchanges and investments in other exchanges, and Dubai World, the government-owned company that last year bought 10 per cent of MGM Mirage, the US gaming and resorts group, have $5.8bn and $5.0bn respectively in foreign currency loans to repay in 2008 and early 2009.
Merrill plays down the risk of a Dubai default but some bankers there say the emirate may have to sell assets, perhaps to some of its wealthier neighbours, to meet its obligations.
The global crisis has coincided with growing concern about Dubai's property market, with analysts questioning whether demand from expatriates moving in will match the supply of units coming on to the market. While the total exposure of the Dubai banking system to property is only 17 per cent, analysts say the percentage is higher for some of the smaller banks, making them vulnerable to a downturn.
Among Dubai officials, the mood remains confident. Many insist that there is still no end to the city's ambitions. They point out that Dubai has a record of taking bold steps when everyone else is retrenching. Dubai's Emirates airlines placed the industry's largest ever airline order just after the September 11 attacks on the US in 2001.
Indeed, government-backed companies have continued to unveil projects including, most recently, a kilometre-high skyscraper. When asked how Dubai's vision will continue to be financed, officials shrug and insist that credit remains available.
Analysts and bankers in Dubai, however, say that while top government officials need to maintain public confidence, the emirate will have to scale back its ambitions. "They have to continue saying that it's all OK - this is what the country is built on and they cannot give an inkling of doubt," says a Dubai banker.
But for all the hubris shown by the emirate, says one official in Abu Dhabi, "Dubai will have to adjust and realise that the world is not the same."
Additional reporting by Simeon Kerr in Dubai and Andrew England in Abu Dhabi. Under syndication arrangement with the FE