BC’s Lara Setrakian reports from Dubai:
“The feel-good factor returned to markets,” one day trader told Abu Dhabi’s The National newspaper, hours after the news that Abu Dhabi would bail out Dubai World with a $10 billion package.
“The sun is much brighter than yesterday…we are flying high. Now you do not need to worry about the Gulf for another 100 years.”
That sounds like irrationally early exuberance. Dubai’s debt crisis has done irrevocable damage to the emirate’s finances and reputation. Some of its state-owned companies have been downgraded to below investment-grade — that is, junk status. Its faces a total debt burden between the officially-announced $80 billion and the high-mark of $150 billion, estimated by investment bank EFG Hermes. Investor confidence is shot, because of the now-defunct assumption that Dubai stood firmly behind its companies, and that Abu Dhabi stood firmly behind Dubai. Now that Dubai has distanced itself from its debt, and Abu Dhabi has said it would “pick and choose” where it helps, the question of which bills get paid is anyone’s guess.
What’s the $10 billion cash gift has made certain is that there will be fundamental changes in the way Dubai Inc does business. Expect less flash and few, if any, new mega-projects like the ones that marked the city’s rise. Wait for Dubai to act less like its own country and more like part of a federation, with its capitol (and capital) in Abu Dhabi. And hope that the landmark restructuring law, part of the bailout announcement, will give the process more transparency.
A note on that word, “transparency,” something investors have called for since the start of Dubai’s downturn. It signals the complaint that Dubai has not been honest about the extent of its problems, or how much it owes, or how and by whom key decisions are being made. That has made for some nasty surprise announcements, like the one on November 25 that Dubai World would need more time to pay its debts, walking the thin line of default and sending global financial markets into steep decline.
With Abu Dhabi’s hands holding the purse strings, a chastened Dubai will have to learn to fess up more and live on less. Dubai: Act 2 has its feet on the ground — and thanks to Abu Dhabi, a softer landing.
ABC News
