Identifier
Created
Classification
Origin
09DUBAI516
2009-12-01 13:15:00
CONFIDENTIAL
Consulate Dubai
Cable title:  

DUBAI FINANCE UPDATE

Tags:  ETRD KIPR EFIN ECON PREL AE 
pdf how-to read a cable
VZCZCXRO4038
PP RUEHDH RUEHDIR
DE RUEHDE #0516/01 3351315
ZNY CCCCC ZZH
P 011315Z DEC 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 6734
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 0028
C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000516 

SENSITIVE
SIPDIS

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

E.O. 12958: DECL: 12/1/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI FINANCE UPDATE

REF: A. A) ABU DHABI 1114

B. B) ABU DHABI 799

DUBAI 00000516 001.2 OF 003


CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)
This message drafted jointly by Consulate General Dubai and
Embassy Abu Dhabi





C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000516

SENSITIVE
SIPDIS

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

E.O. 12958: DECL: 12/1/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI FINANCE UPDATE

REF: A. A) ABU DHABI 1114

B. B) ABU DHABI 799

DUBAI 00000516 001.2 OF 003


CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)
This message drafted jointly by Consulate General Dubai and
Embassy Abu Dhabi






1. (C) SUMMARY: Dubai and Abu Dhabi financial markets plunged
in Monday and Tuesday trading, the first market openings since
Dubai World's announcement of six month moratorium on debt
repayments (ref A). A senior Dubai finance official distanced
the Dubai government from Dubai World's non-sovereign debt in
the clearest sign to date that Dubai World, as well as Dubai's
other government-related entities (GREs) cannot expect a
government bailout, local or federal. In response, Dubai World
executives announced the company is in direct contact with
creditors. The banking sector appears to be faring better than
expected, and the impact on Abu Dhabi may be less than initially
believed. END SUMMARY.



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UAE STOCKS DOWN SHARPLY AT MARKET OPENING

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2. (C) UAE stocks plunged on November 30, the first day of
trading since the Dubai World debt announcement, and there were
additional losses in December 1 trading. The Dubai market index
lost 7.3 percent and Abu Dhabi was down 8.3 percent on the 30th,
for a one day loss of over USD 10 billion in market
capitalization. Banks and real estate firms' clocked large
losses on UAE exchanges, as was widely expected, but investors
dumped everything from telecom giant Etisalat (down 9.7 percent)
to the start-up Air Arabia (down 9.6 percent). Brokers
complained in media reports that there were no buyers in the
market, and analysts noted most investors would have sold at
even lower prices if buyers could be found. It was however
difficult to judge the broader regional impact of the crisis
since some of the GCC markets remain closed for the Islamic Eid
holiday, most notably Saudi Arabia. The reopening of Saudi

Arabian exchange, which is the largest in the Gulf by market
capitalization, on December 5, will provide a better idea of the
possible spillover effect of the Dubai World debt announcement.


--------------
CLARIFICATIONS CONTINUE

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3. (C) A statement by Dubai World early morning December 1st
that the company is in direct talks with creditors seems to have
contributed to the improvement in global markets. Dubai World
characterized its discussions with creditors as "constructive"
towards restructuring at least USD 26 billion of its debts,
which include USD 6 billion from beleaguered Palm Island
developer Nakheel. Prior to the crisis, DP World CEO Sultan bin
Sulayim told Consul General that while DP World's debt load was
considerable, he was confident that creditor banks would be
willing to refinance to extend maturity dates given that DP
World loans were backed by assets, including substantial amounts
of Dubai property. Part of the DP World restructuring will
include sales of DP World assets outside the UAE, albeit at
considerable loss. If managed correctly, the refinance
discussions with creditors and sales of assets may be the
conglomerate's best effort yet to begin to meet its considerable
2009-2011 debt obligations. Also, fixed income analysts assert
that the USD 4 billion in Sukuk bonds owned by Nakheel are also
implicitly backed by assets consisting of the lease hold
interest in all lands, buildings and other property known as DWF
South and Crescent Lands at Dubai Waterfront, which could be up
for grabs.



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NO GURANTEES FOR DUBAI WORLD SAY AUTHORITIES

--------------



DUBAI 00000516 002.2 OF 003




4. (C) In an important statement Monday, Dubai Finance
Department Director General Abdul Rahman Al Saleh declared the
Dubai Government's distinction between sovereign and private or
corporate debt. In comments to the press, Saleh asserted that
"sovereign debt is covered by a sovereign guarantee, while
commercial debt is like a loan taken by any commercial entity in
the market and is not guaranteed." Saleh further declared that
investors bear responsibility for assuming government guarantees
for DP World where none were in fact guaranteed. "It is not
correct to assume that Dubai World is part of the Government of
Dubai. The lenders should bear part of the responsibility," he
said. The statement corroborates what Treasury Attachi heard
from senior UAE Central Bank sources over the weekend wherein
Abu Dhabi would back Dubai sovereign debt but not defend
"private" debt built up by Dubai GRE's over the past several
years. And while market participants are beginning to digest
these assertions, they go against a widely-held expectation that
either the Dubai or Abu Dhabi governments would ultimately back
Dubai GRE obligations. The fact that they won't is a severe
blow to the credibility of the Dubai-based companies that led
development here and will make it very difficult for such
companies to raise financing for the foreseeable future. Chief
Economist at National Bank of Abu Dhabi, Giyas Gokkent, told
Econ Chief that no Dubai-based entity will be able to access
credit markets in the foreseeable future.



--------------

DUBAI'S GLOBAL BRAND AT RISK

--------------




5. (C) Despite calls from Dubai government officials that Dubai
Sovereign not be too closely tied to the default of Dubai World,
some participants in the bond market remain convinced that both
remain inextricably linked. Dubai's brand may be tarnished for
the foreseeable future despite the government's best efforts to
reshape the argument about sovereign versus private debt.
Sharif Eid, a bond specialist and Asset Manager at Dubai based
Algebra Capital, told econoff that in the short-term, Dubai
sovereign and private companies have a real black stain in the
debt markets and should only expect to pay very high spreads for
future bond offers. The news about Dubai World's perceived
default has sullied its global brand, especially as a market
leader in the Gulf and MENA region, according to Eid.



--------------

DUBAI'S DEBT ANNOUCEMENT POORLY MANAGED

--------------




6. (C) The market has generally viewed Dubai government's
handling of the Dubai World announcement as a sign of its
continued lack of transparency. A bond analyst from EFG Hermes
noted to econoff that although senior Dubai government and Dubai
Inc. officials continue to spin the announcement as something
that was planned and anticipated, Dubai officials have
unwittingly created a real credibility gap in the eyes of
investors. Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the
Supreme Fiscal Committee in charge of apportioning financial
support to ailing companies, said last week that the Dubai
Government had "full knowledge of how the markets would react"
and would provide more information soon after the Islamic Eid Al
Adha holiday. The UAE begins two more days of holidays
associated with UAE National Day on December 2. We do not
expect further clarity from senior Dubai officials until after
the country returns to work December 6.



-------------- --------------

BANKING SECTOR DOWN, BUT NOT OUT - THE VIEW FROM ABU DHABI

-------------- --------------




7. (C/NF) Initial concerns about the ability of the UAE banking
sector to withstand the crisis may prove to be exaggerated.

DUBAI 00000516 003.2 OF 003


Gokkent told EconOff on December 1 that most UAE banks improved
their liquid positions significantly in the past year and have
applied increasingly prudent lending practices. However, even
government-related banks were caught off guard by the Dubai
World announcement. The economist said NBAD - the largest bank
in Abu Dhabi and second largest in the UAE - always predicted
Dubai would ultimately repay its debts. (Note: NBAD announced
on November 30 its total Dubai World exposure (to Nakheel and
Limitless) is less than USD 350 million. End Note.) While
Standard and Poor's placed Abu Dhabi Commercial Bank on credit
watch on November 30, it is unlikely the Abu Dhabi Investment
Council, which owns over 60 percent of the bank, will let it
fail. Several Dubai banks reportedly took advantage of Central
Bank liquidity provisions announced in 2008 in the fall of 2009
to shore up their balance sheets. The Central Bank's new
liquidity provision is also available, although the decision
seems to be more of a cosmetic effort to prevent a bank run that
did not materialize than a necessary step at this point.




8. (CN/F) Despite the Abu Dhabi market drop, Abu Dhabi's
financial position appears to remain comfortable. Standard and
Poor's reaffirmed Abu Dhabi's strong AA/A-1+ credit rating on
November 25. While ahead of Dubai's standstill announcement,
the emirate and its government related entities (GREs) remain
well positioned to ride out the storm. Oil, which contributes
over 60 percent of Abu Dhabi's GDP, remains priced at a
comfortable USD 75 or higher. Abu Dhabi and several of its
large GREs (e.g., investment firm Mubadala and developer Aldar),
successfully issued over USD 7 billion in bonds over the summer
(Ref B). Abu Dhabi's fiscal and trade position remain strong,
likely encouraging investors to continue to view it on par with
Qatar, rather than Dubai. Despite its relative strength, there
is still much about Dubai's situation that likely concerns Abu
Dhabi officials, as the government, private sector, and
individual citizens still hold significant investments in Dubai,
particularly in real estate.



--------------

COMMENT

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9. (C/NF) While many in the UAE had hoped that the worst of the
economic crisis was behind them, reality is beginning to set in
that 2010 may actually be worse than 2009. Real estate and
other asset prices will likely continue to decline, particularly
in Dubai, which already witnessed real estate declines of over
40 percent in some areas. Dubai Government spending may
contract, as trade volumes, tourism and financial sector also
continue to weaken in the coming months. While it is now clear
that there is no government bail-out for Dubai World, some form
of support from Abu Dhabi is likely still in the cards,
particularly if GCC markets see similar declines to UAE markets
and fears of a significant regional impact materialize. END
COMMENT
SIBERELL