Since the full scale of Dubai’s huge debt mountain hit home late last year, many investors who have sunk billions of dollars into the emirate’s extravagant projects have been turning their heads to the UAE’s capital for reassurance.
For years, as Dubai built one grandiose scheme after another there was the assumption – unwritten but widely believed – that Abu Dhabi would be on hand to pick up the pieces if the emirate’s bubble burst.
But with Dubai raising the possibility that one of its flagship entities may default, attention is now focusing on just how far Abu Dhabi is willing to go to bail out its smaller brother. Underlying the uncertainty, it is thought that Abu Dhabi officials were caught unaware by Dubai World’s dramatic statement, which came just hours after two Abu Dhabi-controlled banks had agreed to subscribe to a $5bn Dubai bond.
Seasoned Gulf-watchers point out that the affair is a wake-up call to investors who expected Abu Dhabi to write a blank cheque for Dubai, saying they failed to understand the complex dynamics of the relationship between the UAE’s two largest and often competing emirates.
One UAE-based banker said he received phone calls from senior Abu Dhabi officials seeking information about Dubai World’s request for a standstill with creditors. Since then, there are reported to have been discussions between the two city states as markets around the world tumbled and the UAE’s reputation has been put through the shredder. Speculation is now rising that Abu Dhabi will be forced to take action.
“It’s one country but not one set of people – it’s two sets of people kind of cohabitating,” says a UAE-based banker. “It shows the federal mechanism is not working fluidly in terms of communicating messages, but who ever thought it did?”
While Dubai has grabbed the headlines, Abu Dhabi is the undisputed financial heavyweight. Yet all the UAE’s seven emirates enjoy – and pride themselves on – a large degree of autonomy, while Abu Dhabi has no legal liability to support its poorer neighbours.
Since the economic crisis struck, Abu Dhabi officials have repeatedly talked up the strength of the union and insisted they would not allow another member of the family to fall.
Bankers also say that it would damage Abu Dhabi if Dubai – just a 1½ hour drive from the capital – imploded, particularly given the exposure of Abu Dhabi entities, investors and banks to Dubai. Abu Dhabi officials have previously said support for Dubai would be forthcoming if needed. But it has also been clear that the capital would not simply pour money into Dubai without scrutiny, particularly for developments it considered white elephants.
The question many have raised is what price would Abu Dhabi put on its support? Would it require equity stakes in the better-run Dubai entities? Would it use its financial clout to rein in Dubai to ensure the excesses were not repeated? Would Abu Dhabi’s hawkish leaders seek to persuade Dubai to curb some of its economic ties to Iran?
Dubai also knows there are more straightforward costs – loss of face and a weakening of its independence.
In February, the UAE central bank subscribed to the first $10bn of Dubai’s $20bn bond programme after weeks of speculation. That provided the veneer of federal support, but the central bank is dependent on Abu Dhabi’s riches.
Many assumed that the central bank – backed by Abu Dhabi – would be on hand for the next $10bn tranche.
One UAE-based banker with knowledge of the process said Abu Dhabi entities were evaluating Dubai assets in the summer, with some officials arguing that the support would need to take the form of a mortgage.
Ultimately, though, there is consensus that Abu Dhabi will not see it fail.