DOWN IN DUBAI: Sheikdom faces curb on money-hub ambitions after Abu Dhabi bailout

Written by Henry Meyer / Bloomberg

Tuesday, 24 February 2009 23:59

A LUXURY villa stands for sale on the Jumeirah Islands development by Nakheel in Dubai, United Arab Emirates, in this February 2009 file photo. CHARLES CROWELL/BLOOMBERG NEWS A $10-billion bailout from neighbor Abu Dhabi threatens to cost Dubai its autonomy and the free-wheeling economic system that helped establish it as the Middle East’s main business hub. The financial help comes as the sheikhdom, one of seven within the United Arab Emirates along with Abu Dhabi, is struggling with damage to its international reputation after an Israeli tennis player was refused a visa for the Barclays Dubai Tennis Championships it hosts. Abu Dhabi, which pumps more than 90 percent of the UAE’s oil and has long objected to its neighbor’s debt-fueled expansion, has the means to rein in Dubai. The smaller emirate accumulated $80 billion in debt to build real-estate projects, including the world’s tallest building, while Abu Dhabi amassed one of the world’s largest sovereign wealth funds. “Abu Dhabi is lending its credibility to Dubai,” said Eckart Woertz, an economist at the Dubai-based Gulf Research Center, an independent research institute. “Most likely this comes with strings attached, with a price tag. Before, Dubai was dependent on international banks. Now it’s dependent on Abu Dhabi.” The bailout, in the form of the Central Bank of the UAE’s $10-billion purchase of Dubai bonds last Sunday, sparked the largest rally in Dubai shares in three months. Abu Dhabi is the richest of the UAE’s constituent emirates and effectively controls the central bank. Dubai’s real-estate boom, fueled by low interest rates, petrodollars and investment from international companies seeking to tap Persian Gulf wealth, came to a halt last year as the price of Dubai oil fell to about $37 a barrel at year-end from about $90 a year earlier. Moody’s Investors Service said earlier this month that it may downgrade banks and government-owned companies in Dubai if Abu Dhabi didn’t lend its support. Real-estate prices in Dubai have fallen 25 percent from their September peak, Morgan Stanley said in a report. The decline comes as the price of Dubai oil has plummeted by about two-thirds since July and scarce global credit forced investors to dump assets in emerging markets. The emirate may have to refinance $15 billion this year in maturing loans and bonds, according to Moody’s. Government-owned real-estate developer Nakheel PJSC has had to revise plans for its Waterfront project. The company has enough funding for 700 villas, compared with the 10,000 originally planned, according to Sultan Ahmed bin Sulayem, chairman of Dubai World, which owns Nakheel. Dubai built its role as a regional hub by creating special zones for financial services and media, where many local restrictions didn’t apply, and building dozens of luxury hotels, the biggest port in the Middle East and the world’s largest man-made islands. It also hosted leading tennis tournaments and organized high-profile golfing and rugby championships as well as the Dubai World Cup, the world’s richest horse race. “We’ll never see the city getting so far ahead of itself” again, said Christopher Davidson, author of the 2008 book Dubai: The Vulnerability of Success. “There will be a lot more discreet control over what Dubai can do. Abu Dhabi now has considerable leverage.” Abu Dhabi, whose sovereign wealth fund had $328 billion in assets at the end of 2008, according to a study by economists at the Council on Foreign Relations in New York, may now move to buy stakes in Dubai companies controlled by ruler Sheikh Mohammed bin Rashid al-Maktoum, Woertz said. Among them: Emirates, the biggest Arab airline, Dubai’s international airport and the Jebel Ali port. “Abu Dhabi has looked toward Dubai with a mixture of envy and contempt, a bit like old money usually thinks about nouveaux riches and their daredevil business approaches,” Woertz said. The ruler of Abu Dhabi, Sheikh Khalifa bin Zayed al-Nahyan, is president of the UAE; the prime minister is Dubai’s Sheikh Mohammed. The seven sheikhdoms in the UAE share a common foreign and security policy and are autonomous in domestic affairs. Dubai’s vulnerability was heightened in recent months after missteps that harmed its image as a place where capital rather than ideology or politics rules. The UAE government is imposing restrictions on the media and last week moved to bar companies from firing local employees. Dubai authorities were the driving force behind both decisions, Davidson said. The outcry over the UAE’s February 14 decision to deny Israeli tennis player Shahar Peer a visa for the Dubai WTA Tour tournament came two days before a ban on a book with a homosexual character at a festival of literature sponsored by Emirates. The visa wasn’t approved after Dubai refused to endorse her application, Davidson said. The UAE granted a visa to another Israeli player, Andy Ram, for the men’s ATP Tour tournament in Dubai this week after facing the threat of losing its role as host of the championship next year. US Representative Anthony Weiner, a New York Democrat, approached the UAE ambassador in Washington over the issue. Defending champion Andy Roddick also pulled out of the men’s tour in protest at Peer’s treatment. “Dubai has spent hundreds of millions, if not billions, of dollars on burnishing an excellent image as very open and willing to play by international rules and standards, and sports has led the way,” WTA chairman Larry Scott said in a phone interview from St. Petersburg, Florida. “The decision not to allow Peer in put a lot of terrific investments and efforts at risk. It has potential effects and ripple effects that go beyond the world of sport.” n