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'Tough Love' Puts Abu Dhabi in Driver's Seat

Abu Dhabi has essentially gained control of the cash flow of Dubai with its $10 billion bailout, Guy Monson, managing partner and chief investment officer at Sarasin & Partners said Monday.

Dubai at night
Photo Source: Getty Images
Dubai at night

"It’s tough love from the big brother to the little brother," Monson said.

"Abu Dhabi is now back in the driving seat," he said, adding that the multi-billion aid package was by no means a surprise.

With Dubai executives being dismissed over the crisis, the bailout also creates a "change of management control," Monson said.

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News of the bailout sent shares in the Dubai main index 10 percent higher today, recovering some of the losses when state-owned group Dubai World announced it had been facing a crucial debt deadline that also questioned the government’s financial health.

Dubai World will use $4.1 billion to pay the Islamic bond, known as sukuk, that its property subsidiary Nakheel is due to repay. The rest of the money will be used for the "satisfaction of obligations to existing trade creditors and contractors."

Dubai World began talks with banks two weeks ago to restructure $26 billion of debt.

Market participants said investors in the region saw a bigger threat behind the whole crisis: the lack of transparency could be hiding a possible Lehman-type effect that could spread out to the entire Middle East and emerging markets.

"There is a feeling in the region that the infrastructural hub which Dubai now is, is a really valuable entity in the long term," Monson said. "They compare it somewhat to the build out of the Internet and the fibre optic network across the US and the globe at the peak of the tech era."