Dubai’s request for a debt moratorium for its Dubai World conglomerate worried markets on Thursday, but the Gulf city state can count on Abu Dhabi, its deep-pocketed rich brother, to avoid default, analysts said.
“Dubai as a state ... is not on the verge of bankruptcy, thanks to the support of Abu Dhabi,” said Pascal Devaux, Middle East risk assessment economist at BNP Paribas.
Dubai is one of seven city states that make up the United Arab Emirates (UAE), along with Abu Dhabi. On Wednesday, it announced that it intends to request a “standstill” for at least six months on the maturing debt of Dubai World, its largest and most-indebted state-run holding.
PHOTO: REUTERS
That sent jitters through major world stock markets on fears of a potential default by Dubai, which has a total debt of around US$80 billion, mostly owed by state companies.
Standard and Poor’s estimated last month that Dubai state-related companies are due to repay some US$50 billion in debt over the next three years, which represent 70 percent of the emirate’s GDP.
The ratings agency said on Wednesday that Dubai World’s action amounts to a default and it downgraded companies in the group by several notches.
On the immediate horizon, Dubai World construction unit Nakheel was due to repay US$3.5 billion on Dec. 14 in the form of maturing Islamic bonds.
But although the picture appears bleak, Dubai’s oil-rich leading partner in the UAE, Abu Dhabi, is seen as likely to shore up the emirate.
“Abu Dhabi would not allow the financial collapse of Dubai,” Dubai-based analyst Ibrahim Khayat said.
But he said the UAE heavyweight, which sits on more than 90 percent of the federation’s oil reserves and owns the world’s largest sovereign wealth fund, might seek to bring Dubai under its control.
“Abu Dhabi could allow the weakening of Dubai within the framework of the competition between the two, but a collapse of Dubai would also affect Abu Dhabi,” Khayat said.
Monica Malik, from EFG-Hermes investment bank, pointed out that it is not just Dubai that would be affected.
“This announcement highlights the substantial headwinds facing the UAE economy,” she said.
Abu Dhabi has already come to Dubai’s help twice since the once-booming emirate was hit by the global crisis last autumn. The first time was in February, when the UAE central bank pumped US$10 billion into a support fund established by Dubai to deal with its mounting debt issue.
And on Wednesday, just a few hours before raising the specter of default, Dubai announced that it had raised another US$5 billion from two Abu Dhabi-controlled banks that subscribed fully to a new bond issue. Dubai had said it aimed to raise US$20 billion through its support fund.
“The fact that Dubai World requested to reschedule its debt at the time when Dubai raised US$5 billion means that either Dubai is in a catastrophic state or that the loan was conditioned to restructuring the whole group,” Devaux said.
“There is a competition between the two emirates. Maybe Abu Dhabi is taking the chance to put its hand on Dubai, taking advantage of the crisis,” he said.
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