Many people believed that last week’s $10 billion bond deal with the United Arab Emirates was the start of a recovery in the Dubai economy but serious doubts have started to creep in over the last few days. A number of market analysts are suggesting that maybe the Dubai authorities are too proud to ask for further assistance with rumours in the market that certain financing options have been discarded because of a potential threat to the area’s “image”. Are the Dubai authorities really too proud to ask for assistance?
The 7.9% rise in the Dubai stock market last Monday (after the announcement of the $10 billion fundraising) left many investors with a quandary, do they bail out of the market and the area in the short term or was this really a turning point in the recovery process of the Dubai economy, the Dubai stock market and the Dubai property market?
Unfortunately the fact that the Dubai stock market ended the week down 2% is a reflection of the ongoing concern which many investors have with regards to the funding issue and the potential shortfall of $60 billion (after taking into account a second tranche of $10 billion which the United Arab Emirates will be taking on board) on the debt level of $80 billion which has been confirmed by the divided Dubai authorities. The figure relates to the aggregated debt levels for government funded companies which have been very active in the Dubai property market and economy as a whole.
So what next?
As we suggested on one of our earlier post, many investors in the Dubai region took the opportunity to sell their investments into strength and moving into cash in the short term. The potential $60 billion shortfall needs to be addressed as soon as possible but what exactly are the Dubai authorities doing about this substantial shortfall?
Amazingly, when you consider the state of the worldwide money markets the Dubai authorities have expressed an interest in refinancing these borrowings, of which $15 billion are due for repayment over the next 12 months, via traditional money markets. However, if worldwide money markets continue to trade at current levels there is very little chance of refinancing $60 billion of debt, even if it is backed by the Dubai authorities, at a level which would make sound economic sense.
There have been suggestions that the Abu Dhabi authorities (seen by many as the stronger of the Emirates) have offered further financing in the short to medium term. If the rumours are correct it appears as though the Dubai authorities may be “proud” to accept finance from a sister Emirate even if this makes sound investment sense. Whether there is something of a power struggle between the various Emirates remains to be seen but unless the Dubai authorities reconsider the more sensible financial solution available to them, there could be a major collapse in the short to medium term.
How did all go wrong?
While there is no doubt that the Dubai authorities more than backed up their claims of wanting to change the make-up and structure of the local economy, many people believe they were looking to move ahead to quickly and will subsequently pay the price. When you invest close on $100 billion into a new style of economy there is bound to be a bedding down period as local business and local industries switchover from the more traditional economic activities to the likes of property, finance and more importantly tourism.
In a more traditional worldwide economic environment there is every chance that the Dubai authorities would have been able to refinance their borrowings at acceptable levels with the backing of a strong economy, strong property market and growing financial sector. However, as we all know we are not dealing with traditional markets at the moment and many banks and money market participants have taken their credit away from the market.
Even a region with the substantial financial backing of Dubai is not immune to the ongoing economic downturn and many people now believe the only real route to safety is via the Abu Dhabi authorities who are very much cash rich at the moment and have a vested interest in ensuring that the region remains strong and attracts the right kind headlines. But will the Dubai authorities give in and allow a sister Emirate to step into the fray and bail them out?
The immediate future
Many investors in the region have been concerned by the lack of transparency with regards to the $10 billion bond issue, the proceeds from which have not yet been allocated to any specific rescue plans or any specific area of the economy. The Dubai authority’s promise of more transparency looks to have fallen flat at the first hurdle and there is more concern that the details of the second $10 billion tranche of the total $20 billion bond issue have not yet been released.
While technically Dubai may not yet be in a recession many analysts believe it is only matter of time and in reality the economy has swung into a potentially damaging recession. Unless the authorities in the region are able to allay the fears of many investors in the stock market and property market there is the potential for a serious crash which could impact upon the region for many years to come.
In the good old days of a stable worldwide economy the Dubai authorities would have been able to go cap in hand to international investors who until just 12 months ago could not get enough exposure to the region. However, these investors have been repatriating their investments over the last few months and there is very little new money flowing into the region. There appears little alternative but to approach the Abu Dhabi authorities about a further refinancing of the $80 billion debt which would at least take some short-term pressure off what is becoming a very difficult situation.
While it may seem strange to suggest that the Dubai authorities are “too proud” to accept financial assistance from a third party, the signs are there of a determination to bail themselves out of the current situation. However, the likelihood that they will have access to sufficient funding to turn around the ongoing economic downturn in various Dubai investment markets is minimal to say the least.
The International refinancing option is no longer available in the short to medium term and the local authorities are fast running out of alternatives other than the Abu Dhabi government. The market is waiting for direction from the Abu Dhabi and the Dubai authorities and until we see confirmation of concrete plans for the future, to address the ongoing financial situation, stock markets will be volatile with little likelihood of a substantial rise in the short term.