Crisis Puts Focus on Dubai’s Complex Relationship With Abu Dhabi
It was the most subtle of gestures, but looking back, many in Dubai see it as a sign of their salvation.
At the opening of the Dubai Airshow recently, the crown prince of Abu Dhabi, Sheik Mohammed bin Zayed al-Nahyan, placed his hand over the hand of Dubai’s ruler, Sheik Mohammed bin Rashid al-Maktoum. That was widely viewed among people here as a sign that Abu Dhabi, by far the largest and richest member state of the United Arab Emirates, would take care of Dubai.
The question is whether that means Abu Dhabi will use its wealth to bail out Dubai, the deeply indebted emirate that shook world markets when it said last week that its chief investment arm, Dubai World, would not be able to pay its debts on time.
On Monday, investors seemed to believe that the crisis would be contained. Shares in Asia posted sharp gains, making up for many of the losses Friday. The stock indexes of Dubai and Abu Dhabi, in their first day of trading since the debt problem was announced, were down 7.3 percent and 8.3 percent — not by the 10 percent that many investors had feared. In Europe, major indexes were down less than a percentage point by midday.
The director general of the Dubai Department of Finance, Abdulrahman al-Saleh, said market reaction to Dubai World’s announcement was exaggerated and did not match the extent of the company’s woes.
“I think banks are not at a stage where they need any extra liquidity from the central bank,” he said on Dubai TV, Reuters reported from Dubai. “Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct.”
Dubai is seen as the brash, secular upstart of the seven emirates, and Abu Dhabi is known as the religious and conservative big brother. Tensions between the two are common, but when reporters questioned Sheik Mohammed of Dubai about problems last week, he told them to “shut up.”
Nevertheless, the debt crisis of the last few days has fed the speculation that Abu Dhabi would impose conditions for any bailout, including a stake in prominent Dubai enterprises like Emirates Airlines. Officials of the federation have rejected those rumors.
The United Arab Emirates’ central bank said in a statement Sunday that it would stand behind foreign and domestic banks operating in the emirates. It did not mention Dubai World, which is $59 billion in debt.
Analysts said the statement would not be enough to allay fears that the Dubai government could default on part of its sovereign debt.
Still, as fear from Dubai’s debt crisis circled the globe, an unaccustomed quiet settled here at the center of the storm.
Foreign bankers and other professionals here are simmering in anxiety as the world talks about Dubai like a bad seed of the global economy.
“A lot of people are pretty freaked out,” said one American businessman with long experience in the region, who spoke on condition he not be identified for fear of repercussions. “They’re all watching CNN and going: ‘Is Dubai going to default?’ ”
Many in Dubai have a different perspective.
“Dubai is a victim of media distortion,” wrote one reader to a Web forum of one of the emirates’ most popular newspapers. “All the Western countries have ganged up on Dubai. Why? Because it has succeeded.”
Another reader wrote, “This is all because of jealousy from the Western world,” adding that “Dubai has been at the forefront of development in the Arab world.”
Many Dubai citizens seem inclined to dismiss all talk of tension among the emirates, saying that they are not worried about their country’s future.
“Only a few decades ago, this country was nothing, just a desert,” said Thani al-Falaasi, a 31-year-old Emirati businessman who was shopping Sunday with a friend in the Dubai Mall. Referring to Dubai’s leader, Sheik Mohammed, he said: “He built it up. Even if there is a crisis, he can solve it. We have great confidence in him.”
Secrecy breeds distrust
That is not the view from elsewhere in the emirates. Like Dubai’s bankers and bondholders, the United Arab Emirates government was surprised by Dubai’s statement that it would need to freeze repayments on the debt of Dubai World.
Abu Dhabi, which has more oil than Dubai and no cash problems, could easily wipe out Dubai World’s $59 billion of debt, analysts say.
But that seems unlikely. Despite the announcement by the emirates’ central bank that it would make more money available to local and foreign banks in Dubai, analysts say such imprecise promises — the bank did not say how much, or that it would back all the debt of Dubai or Dubai World — may not be enough to placate investors.
Many have been left wondering, again, whether Dubai’s debts are worse than most of the world suspects. Analysts estimate Dubai’s total debt at about $80 billion, but some analysts say it could be closer to $120 billion.
The authorities might have hoped that the timing of the announcement — just before United Arab Emirates, and most of the Middle East, was about to shut down for the Id al-Adha holiday — would minimize its damage. Instead, it did the opposite.
The operative question is whether the governments of Abu Dhabi and the United Arab Emirates will rescue Dubai from the consequences of its profligacy.
If it does not, the secondary effects could spread to Greece, Britain and some Baltic states, all heavily indebted nations; to India and the Philippines, whose workers in Dubai send back millions to support their families each year; or to any corner of the market for credit that individuals, companies and countries rely on.
On Monday, though, the Philippine central bank governor told reporters that a debt default would not harm remittances from Filipinos working abroad. “I don’t believe there would be a significant adverse impact on flows to the country in the near term,” said Amando Tetangco, the central bank governor, according to Reuters.
In Dubai, the crisis has brought to the fore the resentments that foreign workers, who make up 90 percent of Dubai’s population, have held toward the small minority of Emiratis who own the city.
Foreigners here have complained for years that Dubai is too secretive about its debt and finances and that its rapid growth came at the expense of accountability.
“It breeds further distrust,” said John McGaw, a senior adviser to Golden Oryx, a Dubai business development company. “A lot of people have been disappointed with the way they have been treated over the past 12 to 18 months.”