DUBAI WORLD "DEFAULTS"

S E C R E T SECTION 01 OF 03 ABU DHABI 001114

NOFORN
SIPDIS

DEPARTMENT FOR E, NEA/FO, EEB/FO, EEB/IFD, AND NEA/ARP (MCGOVERN)

E.O. 12958: DECL: 11/29/2019
TAGS: EFIN ECON PGOV AE
SUBJECT: DUBAI WORLD "DEFAULTS"

REFS: A) DUBAI 505
B) DUBAI 491 AND PREVIOUS
C) DUBAI 457
D) ABU DHABI 1008
E) DUBAI 253
F) ABU DHABI 464
G) ABU DHABI 189

ABU DHABI 00001114 001.2 OF 003


CLASSIFIED BY CDA DOUG GREENE FOR REASONS 1.4 (B AND D).

This message drafted jointly by Embassy Abu Dhabi and Consulate
General Dubai


1. (S/NF) Summary: On November 25, the Government of Dubai announced
that parastatal conglomerate Dubai World had requested a debt
standstill from creditors. The news shocked international investors,
who had long expected Abu Dhabi to continue to bailout its neighbor's
massive debt under the rubric of "too big to fail." While Abu Dhabi
officials report they do stand behind Dubai, and the UAE Central Bank
has stepped in to support liquidity in the banking sector, key
officials in both cities now report a distinction has been made
between public and private entities. In the short term, Dubai is
likely to be forced to undertake significant management and financial
reform, improve transparency and sell off key Dubai Inc. assets in
order to revitalize what is arguably the Gulf's economic heart. The
situation continues to unfold, but also raises new concerns about the
health of the UAE banking sector and economy, which we will be
watching carefully in the days ahead. More broadly, Dubai's woes
highlight that the UAE remains a developing country - both
politically and financially - and highlights weaknesses that may find
parallels in other economies in the region. End Summary.

WHAT HAPPENED
--------------


2. (SBU) On November 25, the Government of Dubai announced that
parastatal Dubai World had requested a debt standstill from
creditors. Under the plan, Dubai World would effectively cease
payments on its USD 59 billion in debts until May 30, 2010. Markets
and analysts quickly read the request as the likely first step to a
subsequent default, specifically of Dubai World subsidiary Nakheel's
USD 3.5 billion dollar Islamic sukok (bond) which comes due December
14 (Ref B). (Note: International bankers told EconOff that one U.S.
pension fund holds 10 percent of this bond. End Note.) The
announcement, coming on the eve of a UAE government holiday through
December 5, surprised many analysts who expected Abu Dhabi would
support Dubai's largest entities, regardless of the cost.


3. (C/NF) This is a stunning turn of events for the huge Dubai-based
conglomerate, that began as operator of Dubai's ports and the Jebel
Ali Free Zone and quickly expanded overseas in the 1990s. Dubai
Ports World (DP World) went on to acquire P&O in 2006, only to sell
off P&O's U.S. assets after Congressional opposition to the
investment. (Note: Subsidiaries Dubai Ports World and the Jebel Ali
Free Zone Authority are reportedly not included in the standstill
request. End Note.) Along the way, Dubai World branched into real
estate development and, through its subsidiary Nakheel (Arabic for
date palm),became one of the largest land holders in Dubai. Nakheel
created some of Dubai's most famous landmarks, including the Palm
Islands and The World developments. Dubai World's investment firm
Istithmar purchased international landmarks, like the QE 2, Miami's1Smu$+sQ~5xQ9rney's clothing store. The majority of Dubai
World's expansion was financed by debt, which investors were led to
believe was backed by the Government of Dubai.


4. (C/NF) The timing of the debt standstill announcement created
tremendous anxiety among investors, as it generated hundreds of
questions but gave no clear details on who was in charge. On November
26, official news agency WAM released an official statement from
Sheikh Ahmed bin Saeed Al Maktoum, Chairman of Dubai's Supreme Fiscal
Committee (Ref E). Sheikh Ahmed, who is also the Chairman of
Emirates Airline, stated the "intervention in Dubai World was
carefully planned and reflects its specific financial position...We
understand the concerns of the market and the creditors in
particular. However we have had to intervene because of the need to
take decisive action to address its particular debt burden." Dubai
also announced on November 25 that Aidan Birkett, a senior Deloitte
restructuring expert, would oversee the Dubai World restructuring
effort on behalf of the Dubai Financial Support Fund.

WHAT IT ALL MEANS
--------------


5. (S/NF) Over the past year, UAE federal and emirate-level officials
unequivocally told EmbOffs that local and foreign investors and
contractors who profited from Dubai's boom in years past must also
share in any subsequent downturn (Ref C). Similarly, senior
officials now seem to be drawing a clear line between

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public/government obligations and the debt of quasi-government
entities, like Dubai World, that are no longer assured of receiving a
government bailout. This apparently new policy may be the result, at
least partially, of mismanagement of the original USD 10 billion
"bailout" by the UAE Central Bank (read: Abu Dhabi) in February (Ref
G). Contacts report some of these funds were transferred to Nakheel,
who then paid executive bonuses, rather than debts or obligations to
contractors. While many in Dubai may have once blurred the line
between sovereign and commercial entities, Dubai and Abu Dhabi
officials are now reporting there is a clear distinction. (Note: Abu
Dhabi was apparently caught off guard by the announcement. Several
well-placed contacts reported they had no prior notice of the
announcement. End Note.)


6. (S/NF) Key officials in both emirates long-recognized the moral
hazard risks of a government bailout, but no one seemed to know for
sure how much support Abu Dhabi or Dubai would ultimately offer to
firms like Nakheel. Many foreign analysts argued that the
reputational risk -- and associated increase in financing costs --
made a default or quasi-default unpalatable to both Dubai and Abu
Dhabi. In the end, despite many public claims to the contrary, Dubai
failed to raise the funds it needed to buy its way back from the
brink. The funds from the UAE Central Bank in February (USD 10
billion) and Abu Dhabi based National Bank of Abu Dhabi and Al Hilal
Bank in late November (USD 2.5 billion each) are now reportedly being
carefully managed by a handful of senior technocrats within the Dubai
Department of Finance. But it was not enough to pay off the vast
debt acquired by Dubai World.

THE WAY FORWARD FOR DUBAI
--------------


7. (S/NF) This announcement, coming on the heels of major personnel
changes in key Dubai financial entities (Ref A),is likely the first
of an ongoing process of shoring up Dubai's ailing economy. Dubai's
old guard is increasingly being selected to reign in Dubai's infamous
irrational exuberance and big-spending ways of its increasingly
sidelined "young turks". In his public statement, Sheikh Ahmed
explicitly promised to provide additional details in the coming week,
confirming that the story is far from over. In the short term,
Dubai's sovereign and private entities will only be able to attract
additional financing at very high prices. Several weeks ago,
Emirates NBD, the largest bank in the UAE (by assets),had to scrap
plans to raise cash in the debt markets because spreads were too
high. In contrast, better managed Dubai Government entities like
Dubai Civil Aviation Authority have recently repaid and refinanced
debt.


8. (S/NF) The standstill announcement may help pave the way for
proper asset pricing in Dubai. Robert Bush, the Managing Partner for
Dubai-based Majilis Capital told EconOff that Abu Dhabi investors may
now look for new opportunities at rock bottom prices. Bush reported
that these investors determined in the spring of 2009 that the assets
being offered were over valued. However, the necessity of selling
off assets is a new reality for Dubai, which reportedly turned away
interested foreign investors in past months. Dubai's most attractive
assets (e.g. Dubai Ports World, Emirates Airlines) are also the most
unlikely to be sold, as they form the bedrock of Dubai's economy --
and revenues -- now that real estate sector has tanked. However,
there is a sense that Dubai's "old guard" believes foreign
investments should be divested in order to shore up the local
economy.

...AND THE COUNTRY
--------------


9. (S/NF) In the immediate future, the potential impact on the UAE's
banking sector is a major cause for concern. Coming on the heels of
Saudi Arabia's Saad/Al Gosaibi default (Ref D),local banks face
growing balance sheet weaknesses. One senior Abu Dhabi financial
official reported the Emirate is looking closely at the banking
sector, with an eye to shoring up banks as needed. On November 29,
the Central Bank announced it had established a liquidity facility to
support local and foreign banks with branches in the UAE.
Separately, the UAE private sector is also likely to face a crisis of
confidence, as the reality sinks in that Dubai World entities are
also unlikely to pay back their debts to contractors in the coming
months. Similarly, U.S. firms owed money by Dubai entities are also
likely to continue to face significant payment delays.


10. (S/NF) Addressing Dubai's financial woes is challenging the UAE's
consultative decision making process and senior officials' financial
knowledge. While foreign experts are clearly involved, the
sensitivities are vast, further complicating the speed and accuracy
of a resolution. On the surface, the UAE, especially Dubai, may
appear to be a developed economy, but in most ways it is very much a
developing country, with all of the related weakness of institutions,
oversight, and regulatory structures (Ref F). Senior Dubai financial

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officials tell EmbOffs they recognize the need for financial sector
reform and are already looking at how to establish appropriate
oversight. However, these comments were circulating a year ago, and
little has been done to improve capacity.

COMMENT
--------------


11. (S/NF) Substantively, little in Dubai's financial situation has
changed in the past week. Rather, Dubai has finally publicly
admitted to the overwhelming challenge of servicing its debts. What
has shocked the markets and investors is the realization that neither
Dubai nor Abu Dhabi is planning to step in and rescue Dubai's most
troubled parastatals. Among the key questions still need to be
answered include how does Dubai move forward and the effect on the
balance of power between Abu Dhabi and Dubai. The short- and
medium-term impact on the UAE economy, and the region more broadly,
also remains to be seen. With the slowdown for the extended 'Id
al-Adha and National Day holidays (Nov. 26-Dec. 5),and similar
closures elsewhere in the Gulf, it will take some time before the
path ahead is clear. End Comment.