Dubai got a US$10 billion lifeline from oil-rich Abu Dhabi to save one of its prized companies from imminent default Monday, calming fears for now about the city-state’s shaky finances, said the Associated Press. Dubai’s main stock market spiked more than 10 percent on the news reported by local and international press.
Local news said that the Dubai World, a sprawling conglomerate with assets ranging from the ocean liner Queen Elizabeth 2 to luxury retailer Barney’s New York, had been up against a Monday deadline to repay a pile of loans from its Nakheel property division. Some $4.1 billion of the emergency funds will be used to pay off those bills. The rest will go to shore up Dubai World itself.
Dubai after all, was neither recession-proof nor immune to the global downturn. Just one out of the seven state members of the United Arab Emirates (UAE), Dubai has shown cracks. Dubai has clearly caught up with the world recession despite previous denials and claims that it was business as usual. The leaders of Dubai are reluctant to bear Dubai World’s $60 billion debts that had raised serious concerns about the emirate’s creditworthiness. Abu Dhabi’s action to bailout sister city Dubai appears aimed at allaying fears that more is to happen, before they undercut confidence in the United Arab Emirates as a whole. The two emirates share control of the UAE, a federation of seven semiautonomous city-states.
Abu Dhabi has oil; Dubai has become non-oil dependent for several decades and has made tourism and hospitality their economic engines. Dubai has flourished doing so until the series of world economic events.
Until the middle of last year, Dubai had shown little willingness to accept the fact that it too has been hit by the crisis. Economic and hotel real estate experts based there led people to believe Dubai was very much in control though there were signs of the slowdown. Even contrary to forecasts made by top real estate advisory groups such as Jones Lang LaSalle who insisted that the markets of the Middle East will outperform all other regions of the world in the next 1 to 2 years. The company even polled 350 top developers who believed late 2008/ early 2009 that the UAE stood to offer the best performing real estate market if not in the Middle East, then in the world.
Jones Lang LaSalle even released a first official Investor Sentiment Survey at the CityScape Dubai. The study was sent out in the aftermath of the crash of US Investment Bank and Lehman Brothers. It highlighted the fact that almost 50 percent of those surveyed believe the UAE will offer the best performing real estate market over this year and the next, saying investors are confident about the future performance of the Dubai and Abu Dhabi markets.
Into the first quarter of 2009, Dubai had started its slide, as with the rest of the universe. In reality, the so-called City of Gold was losing its manpower behind which the economy was built. Hordes of expatriate workers lost their jobs and were forcibly sent home. Visas were no longer renewed. Dubai cancelled over 86 percent more residence visas early 2009. Data from Dubai’s Ministry of Interior Naturalization & Residency (DNRD) showed that 54,684 residency visas were cancelled during the month of January, compared with 29,418 in January 2008. They were losing people at a rate of 1,764 visas per day.
A Dubai-based analyst said the aid package was to be expected but urged caution. Sheikh Mohamed bin Rashid Al Maktoum, vice president and prime minister of the United Arab Emirates, also the ruler of Dubai, tried to save Dubai with the merger of three large real-estate groups of Dubai Holding, which he owns. The Sheikh has a strong handle on the way his emirate runs from all standpoints–economic, financial, government, practically everything that reflects image and finances. However, in the end, Abu Dhabi’s bailout was inevitable.
Additionally, “This announcement constitutes a specific bailout of Nakheel, suggesting that as an entity (it) was deemed to be ‘too big to fail,'” he said. “It does not, however, constitute a bailout of Dubai Inc. or Dubai World as a whole and this is important to highlight,” said Fahd Iqbal.
Nakheel, a property developer and hotel operator best known for building manmade islands in the shape of palm trees and a map of the world off Dubai’s coast, is central to this package.
Nakheel is the developer of more than $30 billion in real estate in Dubai, and The Trump Organization had signed on the deal with Nakheel in October 2005 creating Trump’s International Hotel and Tower. Both companies have invested substantially in the pioneering $US600 million development spread across a portfolio of eight hotels and resorts including the 800-unit condo-hotel of the US mogul. Trump’s tower was the initial development in Nakheel and The Trump Organization’s exclusive joint-venture in the Middle East. However, Trump Organization’s agreement with Nakheel including exclusive rights for 19 countries in the Middle East region and 17 major brands went south.
Authorities also softened their stance Monday, vowing that the city-state was committed to “transparency, good governance and market principles.” Officials outlined a legal framework that promised to increase openness and protect creditors in future dealings with the conglomerate, offering lenders further reassurance in a country where formal bankruptcy proceedings are largely untested, said the news – a thing that Dubai has been working on since showing signs of the real estate market collapse middle of this year.