DESPITE POSITIVE SPIN, DUBAI'S ECONOMIC WOES CONTINUE

S E C R E T DUBAI 000052


SIPDIS
DEPARTMENT FOR NEA/FO, NEA/ARP (MASILKO) AND EEB
STATE PLEASE PASS TO USTR (BUNTIN)

E.O. 12958: DECL: 2/4/2019
TAGS: EFIN ECON EINV PREL PGOV AE
SUBJECT: DESPITE POSITIVE SPIN, DUBAI'S ECONOMIC WOES CONTINUE

REF: A. A. ABU DHABI 11

B. B. 08 DUBAI 464

CLASSIFIED BY: Paul Sutphin, Consul General, Consulate General
Dubai, UAE.
REASON: 1.4 (b),(d)


1. (S/NF) Summary. The Dubai government's continued reluctance
to discuss details of its financial health, combined with
official statements that the emirate will make due on existing
monetary obligations, maintain a positive (albeit reduced) 2009
GDP, and quickly rebound from the world wide crisis in 2010, has
increasingly strained local business leaders' and residents'
credulity. Few are willing to publically discuss the depth of
potential problems facing the emirate and press coverage remains
largely positive. However, credible rumors of a USD 500 million
Dubai para-statal company loan default, continued lay-offs, and
virtual closures of several Dubai government (or ruling
family)-owned companies indicate ongoing financial woes.
Amplifying the need for long-term change in Dubai's economic
structure, the regional managing director of McKinsey and
Company recently speculated the emirate's total debt stands at
150 billion USD, almost double the 80 billion USD "official"
figures released in late November 2007. End Summary.


USD 80 billion vs 150 Billion in Debt
--------------


2. (C) In late November 2008, Dubai leadership announced that
total emirate debt stands at USD 80 billion (USD 10 billion for
the public sector and USD 70 billion for government-owned
businesses). However, on January 20, speaking before an
audience of 250 key business leaders and government officials
(including the Ambassador) at Paradigm 2009, Kito de Boer,
Senior Director of McKinsey and Company in the Middle East,
valued total Dubai debt at USD 150 billion, attributing USD 80
billion of the total to "Dubai Inc" parastatals. In the
closed-to-the-press event, de Boer speculated Dubai will not be
able to "ride out" the business cycle, as it will need to raise
an additional USD 20 - 30 billion over the next two to three
years. (Note: McKinsey has had a long presence in Dubai and has
done extensive work for the ruling family, including helping
establish UAE VP, PM and Dubai Ruler Sh. Mohammed bin Rashid al
Maktoum's (MbR) Executive Office. End Note)


Business Not Buying the Spin
--------------


3. (C) Ironically highlighting the dissonance between public
message and private sentiments, Paradigm audience members
participated in anonymous electronic polls conducted throughout
the event. Most speakers were loath to deviate from the Dubai
government established party line that the emirate's business
model is solid, there will be downturn (but still positive GDP
growth) in 2009 followed by a 2010 rebound. Program
participants on the other hand registered far deeper concern,
with 52 percent indicating current business conditions are
catastrophic and 61 percent expressing alarm at the lack of
government transparency and sound business strategies.


Dubai Inc.'s USD 500 Million Loan Default
--------------


4. (S/NF) Behind closed doors, post is hearing disturbing tales
of Dubai scrambling to raise cash and meet obligations.
According to a highly credible source within the Dubai
International Finance Center (DIFC),Dubai World's Nakheel
subsidiary (developer of the Palm Islands, among others) has
moved into default status on a USD 500 million loan underwritten
by a Dutch financial institution (NFI). As underwriter of the
credit insurance for the issuing bank, the Dutch Ministry of
Finance is deeply concerned about this and a slow down in
payments on other outstanding Dubai World loans. The DIFC
official indicated that MbR (primary owner of Dubai World) and
the Dutch Crown Prince were to discuss the issue on 20 January.
Post has no further information at this time.


Mortgage Lenders Amlak and Tamweel are Effectively Bankrupt
-------------- --------------


5. (C) In a government decreed merger, mortgage lenders Amlak
Finance and Tamweel (jointly controlling over 60 percent of the
Dubai mortgage market) have been subsumed by the UAE Ministry of
Finance-controlled Real Estate Bank. According to multiple post
contacts, both lenders are essentially bankrupt and have had to
shut down all lending activities. With a combined mortgage book
valued at USD 20 billion, there are no clear indications as to
what percent of the book is approaching toxic status. According
to one senior Amlak executive, however, only 50 percent of
outstanding loans are for completed development.


Rumors of Sell Offs and Layoffs
--------------


6. (C) In both public and private venues, post continues to hear
of ongoing layoffs and sell offs affecting both Dubai Inc. and
privately held businesses. Several sources recently commented
on large scale layoffs in Tatweer's (part of parastatal Dubai
Holdings) Dubailand and other entertainment businesses, with all
noting the division has effectively shut down. According to one
UAEG Ministry of Labor contact, roughly 1,500 residency visas
per day have been cancelled since November 2008. Reinforcing
rumors of Istithmar (another subsidiary of Dubai World)
liquefying assets, recent press noted the parastatal is looking
for a buyer for US retailer Barneys New York (acquired by the
Dubai investment fund two years ago).

Comment
--------------


7. C/NF) Though far from conclusive, the indications appear to
suggest that Dubai is scrambling to raise cash by slashing
operating costs and selling off assets. Recent press reports
have listed upwards of 80 Dubai projects that have either been
cancelled or significantly delayed, including iconic ones such
as the large Palm Deira island and the Trump Tower hotel on Palm
Jumeirah. Whether it will generate enough funding (without Abu
Dhabi's assistance) is up for debate. While de Boer's estimates
of outstanding debt and upcoming capital requirements were
subsequently dismissed as overly pessimistic by senior UAEG
officials, post believes they are likely more on target than the
"official" disclosures. As noted, McKinsey has long been the
consultant of choice for Dubai's brand-name conscious official
and parastatal leaders and the consultancy's intimate access to
Dubai Inc. balance sheets likely provides them one of the best
views on the state of the local economy. If McKinsey is
accurate, Dubai could be in for a very long and tough economic
"correction." End Comment.


SUTPHIN