Dubai may forfeit financial hub for Abu Dhabi help

‘The bailout will mean eliminating financially unviable parts of the competing, state-run companies which lie at the root of the city’s at least $80 billion debt’

Dubai, the debt-laden Gulf city-state, may lose its status as the region’s financial hub in return for a rescue package from its oil-rich neighbour Abu Dhabi, economists and analysts said.

The bailout will mean eliminating financially unviable parts of the competing, state-run companies which lie at the root of the city’s at least $80 billion debt, according to Dubai-based UBS AG analyst Saud Masud. Dubai may also have to revert to specialising in trade and services, and drop its drive to become a regional banking centre, said Ian Hay Davison, former chairman of the Dubai Financial Services Authority.

“Abu Dhabi has financial ambitions of its own,” said Eckart Woertz, an economist at the Gulf Research Centre in Dubai. “Dubai will have to focus on its core competencies. There is terrible damage to its ambitions in the financial field from how it handled this.”

The immediate future of Dubai, whose ruler Sheikh Mohammed Bin Rashid Al Maktoum guarded the emirate’s independence, rests on how creditors respond to the demands to delay payments on $59 billion in debt and liabilities of flagship holding company Dubai World. The news sparked a sell-off in world stock markets last week due to concern that emerging-market risks may set back recovery from the worst global decline since the 1930s.

Abu Dhabi’s ADX General Index plunged 8.2 per cent by 12:30 pm on Monday, the most in more than three years, on concerns that Dubai’s debt problems will spill over into the emirate. Dubai’s DFM General Index lost 7.2 per cent. Moody’s Investors Service says Dubai’s debt may be as high as $100 billion, of which up to $25 billion is bad debt. Dubai World property unit Nakheel PJSC has $3.52 billion of Islamic bonds due on December 14.

The UAE’s Abu Dhabi-based central bank said it “stands behind” the local and foreign banks. Abu Dhabi has yet to say whether it will step in to avoid default on the Nakheel bond. The sheikhdom has one of the largest sovereign wealth funds in the world, worth $627 billion according to the Roseville, California-based Sovereign Wealth Fund Institute. The emirate, in control of 8 per cent of the world’s oil reserves, is plowing the cash into its own diversification effort, buying shares of international banks, car makers and chemical companies.