S E C R E T SECTION 01 OF 04 DUBAI 000111

SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP FOR BMASILKO

E.O. 12958: DECL: 3/5/2019
TAGS: TC PREL EINV ECON EFIN
SUBJECT: LACK OF TRANSPARENCY AND CONFIDENCE COMPOUND DUBAI'S
CONTINUING ECONOMIC SLIDE

REF: A) ABU DHABI 189, B) DUBAI 52, C) DUBAI 40, D) 08 DUBAI 464, E) 08 DUBAI 417, F) 08 ABU DHABI 1221

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CLASSIFIED BY: Paul R. Sutphin, Consul General, Exec, State.
REASON: 1.4 (b), (d)

1. (S/NF) Summary and Comment: Attempts to put a positive spin
on the extent of Dubai's financial crisis continue even as some
of Dubai's financial elite continue to voice concern over a deep
and growing shortfall of cash, credit, and confidence. Sluggish
efforts by Dubai officials (and to some extent the UAEG) to
limit the damage are being criticized as non-transparent and too
limited to restore confidence. Meanwhile, new project
cancellations or delays are emerging every day. Dubai's most
prominent parastatals continue to move toward consolidation, but
these steps, generally viewed as essential to any recovery, are
being downplayed by the government to the detriment of any
confidence-building impact. Increasing disclosures of
investigations and prosecutions of a number of finance and
development executives have fueled the rumor mill about what
more there is to come. While some clear-eyed analysts have
pointed out some positive effects of the crisis on Dubai's
over-ambitious, over-leveraged and overheated economy, and noted
it is well-poised to be in the forefront of the global recovery,
a more forthright acknowledgment of Dubai's difficulties by its
government, and clear steps (beyond the recent bond issue, Ref
A) to address them in concert with the federal (i.e. Abu Dhabi)
government would do much to help. End Summary and Comment.



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Scope of Crisis Continues to Emerge

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2. (S/NF) While reliable numbers on Dubai's official debt remain
elusive, Hamad al Buamim, Director General of the Dubai Chamber
of Commerce and Industry (Dubai Chamber), is on record
estimating it at USD 120.2 billion, or 57 percent of the UAE's
estimated total debt. Dubai Chamber statistics also show a 25
percent decline in total Du

bai trade for January 2009 versus
January 2008. But it is the real estate sector, the primary
engine of wealth in Dubai in recent years, that has been hardest
hit, falling hard from its unsustainable, overheated and
over-leveraged heights. Jones Lange LaSalle, perhaps the
premier real estate consultancy in Dubai (a U.S. company),
privately estimates that overall new private and commercial
property prices have fallen 50 percent since their July 2008
high, much more sobering than the 25-30 percent decline the
local press continues to report.




3. (S/NF) A senior CEO of a Dubai financial parastatal told the
CG on March 4 that Dubai, "while illiquid is not insolvent." He
estimated that, at a maximum, an injection of USD 50 billion
would put Dubai back on solid financial footing (a much cheaper
price tag, he noted, than the cost of Dubai failing). Blair
Hagkull (protect throughout), managing partner at Jones Lange
LaSalle, recently argued to the Consul General that the UAEG's
September 2008 injection of USD 14 billion into banks (Ref F)
had not succeeded in stimulating lending because too many
strings were attached. "Banks won't touch it" because they are
worried that conditions attached might lower their
creditworthiness. (Note: Hagkull also shared, as an example of
the real estate cash crunch, that many of Jones Lange's major
Dubai government parastatal clients, including Sama Dubai,
Tatweer, and Nakheel, were overdue in their payments to the firm
for work already completed. End Note)



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Continuing Transparency Concerns, Lack of Confidence Temper Bond
Issuance Boost

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4. (S/NF) Dubai's February 22 bond issuance of USD 20 billion
(USD 10 billion of which the UAE Central Bank -- aka Abu Dhabi
-- will subscribe to) has eased concerns of imminent defaults
(Ref A). Nonetheless, confidence in Dubai's financial security
remains low. Complaints about Dubai (and the UAEG's) sluggish
reaction last year to the emerging crisis and an ongoing lack of
transparency continue to undermine efforts to contain the crisis

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and restore a medium of confidence to the Dubai business
community.




5. (S/NF) Despite attempts by "Dubai Incorporated" to signal the
crisis is in hand and limit negative press, prominent members of
the financial community are deeply concerned, and believe more
should be done. A Dubai Chamber report calling for greater
transparency in addressing the growing crisis, was not
distributed publicly due to pressure from Dubai officials, an
unprecedented turn of events for the semi-official organization.
DG Buamim (protect) told the Consul General that it remains his
strong belief that lack of transparency is continuing to fuel
injurious speculation and increasingly critical press reports.
Henry Azzam, Regional CEO for Deutsche Bank, has publicly
criticized the UAEG for being behind the curve and reactive. He
has also questioned why, if the UAEG was sincere about not
letting Dubai fail, it waited so long to initiate a bailout.




6. (S/NF) Mohammed Gergawi, UAE Minister for Cabinet Affairs
(and chief aide to UAE Vice President, Prime Minister and Dubai
Ruler Sheikh Mohammed bin Rashid al Maktoum (MbR)) recently told
the Consul General Dubai's debt is "under control." Gergawi
said he and Dubai Royal Court Director General Mohammed al
Shaibani have been tasked by the Ruler to lead Dubai's efforts
to cope with the crisis and work to "consolidate and
rationalize" Dubai's parastatal companies. He signaled there
would be major shake ups, consolidations, and even some
prosecutions for financial malfeasance. (Comment: Gergawi is
Chairman of Dubai Holdings, largely the personal assets of MbR
in many forms. A string of consolidations has indeed been
announced (see below), although their scope and depth is being
glossed over in the local press. End Comment)



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Consolidation: Necessary Medicine - but Potent Enough?

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7. (S/NF) It remains conventional wisdom in Dubai's financial
sector that mergers and consolidations of competing government
companies are necessary components of any escape plan for the
current crisis. Dubai Group (a Dubai Holdings investment
company) CEO Tom Volpe (protect) continues to urge the Dubai
leadership, to use the current downturn to get Dubai "fit." He
also anticipates at least one major equity transfer to Abu Dhabi
in the coming year. While it is possible Abu Dhabi could
purchase a stake in Dubai Holdings or merge Emirates and Etihad
airlines - both smart moves for the UAE in the long run - he
believes we are most likely to see a merging of the Dubai's two
stock exchanges and Abu Dhabi's exchange into a single national
exchange which would retain the NASDAQ branding now associated
with Bourse Dubai.




8. (S/NF) Volpe described the consolidation of Dubai Holdings
(set to include the merger of its two investment arms, Dubai
Group and Dubai International Capital (DIC), as well as the
merger of real estate companies Mizin, Sama Dubai, and Dubai
Properties). Volpe strongly implied the various management
chains need to be streamlined. Dubai Holdings needs to focus on
(1) meritocracy regarding senior executives; (2) consolidation
in-house; and (3) finding financing. Volpe argued this process
should happen more quickly and more thoroughly. A number of
sources have characterized Mizin and Sama Dubai as failed or
shell companies. Sama has reportedly cut its staff from 640 to

40. (Note: Dubai Chamber DG Buamim opined to the Consul General
that the recent UAE regulation to limit the ability of companies
to lay off Emiratis is a mistake, hurts the ability of the
private sector to be competitive, and sends a bad message to
expatriate professionals. End Note)




9. (S/NF) Another problem plaguing Dubai Holdings' investment
arms are unconfirmed reports that Dubai International Capital's
(DIC) prominent and talented Emirati CEO, Samir Al Ansari, is
under investigation. Volpe looks set to emerge as CEO of the
new "Dubai Holding Investment Group," the result of DIC's merger
with Volpe's Dubai Group. Dubai Group Chairman Saud Balawy will

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be named as chair of the new company. According to Volpe,
al-Ansari will be Deputy Chairman but his writ will be limited
and his longer term future is uncertain.




10. (S/NF) A proposed merger between troubled Dubai lenders
AMLAK (EMAAR's mortgage group) and Tamweel (Dubai World's
mortgage group) may be in serious trouble, according to a
confidential Jones Lange/Linklaters/McKinsey joint study
commissioned by the Dubai Government. This study turned up
dozens of pages of damaging findings. Most egregious was an
estimated half billion dollars paid to AMLAK's seven board
members as "premiums." Other allegations include AMLAK
violations of Sharia principles, including defaults on four
sukook bonds and numerous shenanigans related to the lenders'
foray into property development purchases.



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Project Cancellations Highlight Transparency and Confidence Gap

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11. (S/NF) Hagkull told the CG that more than USD 275 billion in
projects are now on hold or cancelled across the UAE. At least
900 developers, from single project shops to the biggest names,
have been hard hit by a market with insufficient credit and
declining confidence. The latter, he argues, will require clear
and massive government intervention to restore. Currently, only
an estimated seven banks are providing mortgage lending (down
from 24 at the market's peak) in Dubai and loan costs continue
to rise. Jones Lange has proposed to Abu Dhabi that a
government fund of USD 3 billion be set up there to rescue
troubled projects already underway in that Emirate in an attempt
to realize any remaining value. The price tag for a similar
fund in Dubai, he estimated, would likely be in the range of USD
30-100 billion.




12. (S/NF) Multiple senior sources have pointed to high-profile
parastatal Dubai World's Nakheel Property Development Division
as being in particularly bad shape, as evidenced by its
cancellation of a number of high-profile projects (the third
Palm Island, the Trump Tower Hotel and many others). Dubai
Holding's Tatweer Group is also in difficult straits; its
massive Bawadi strip project is cancelled, although it continues
to promote the Tiger Woods Dubai, Universal Studio theme park
and Healthcare City development projects. But even much touted
Healthcare City is facing challenges. One physician with a
large private practice in Healthcare City told us many completed
buildings with unleased space may be shuttered, including the
building her practice is in, and that there have already been
significant staff layoffs -- including large numbers of
physicians -- at the highest profile Healthcare City project,
the Harvard-associated University Hospital. A large hotel
development slated for the project is languishing, lacking
finance.




13. (S/NF) Sama Dubai's two big projects -- the Lagoons and a
redevelopment of Dubai's historic Creekfront -- were on
indefinite hold, and multiple informed sources have told us the
company will "disappear" in the ongoing merger with Mizin and
Dubai Properties. (Note: The press is reporting that corruption
charges are being brought against the former chief executive and
three sales executives (all UAE nationals) at Sama's The Lagoons
project. End Note)




14. (S/NF) Comment: Despite the current gloom, a number of
clear-eyed local senior business people and analysts have
underscored the salutary effects of the current difficulties --
ending speculative property mania and bringing Dubai prices back
down to reasonable levels; a very strong impetus to clean up
Dubai/UAE's barely-regulated mortgage market; and a "pause" to
allow Dubai's overtaxed roads and utilities to "catch up" with
the city's growth (public works projects, including the Dubai
Metro and new roads, have continued largely unscathed by the
crisis). Further, Volpe and others have told us that they
remain bullish on Dubai in the medium/long term -- highlighting
its region-leading business environment, port and free zone, and

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airport -- as well as its attractive, liberal life style for
expatriate talent. In our view, this is all true, but the
immediate future looks to be darker before the dawn as secondary
effects of the global credit crunch, global trade contraction,
and local real estate crash hit the construction, services,
retail and tourism sectors over the remainder of the year. A
popular question is whether Dubai will be "last in, last out" or
"last in, first out" of the global downturn. This remains to be
seen, but a more forthright acknowledgment of Dubai's challenges
by the government, and clear steps in concert with the federal
(read Abu Dhabi) government to address them beyond the current
bond issuance -- all as yet largely unseen -- would do much to
help. End Comment.
SUTPHIN