Bailout may come at high price for Dubai

Life­line gives Abu Dhabi a chance to in­crease its in­flu­ence over the emi­rate

The New Zealand Herald - - BUSINESS - by Ben Hol­land — Bloomberg

Four days be­fore Dubai World sought to de­lay US$26 bil­lion ($36 bil­lion) of debt re­pay­ments last month, Sheikh Mo­hammed bin Rashid Al Mak­toum set out to race his horse, Al Ayed, across 120km of Per­sian Gulf desert.

He had to with­draw when the mount be­came fa­tigued.

Now Sheikh Mo­hammed must prove that the trans­for­ma­tion of Dubai from fish­ing vil­lage to global busi­ness hub isn’t also run­ning out of puff. He has to find a way for oil-poor Dubai to cover at least US$80 bil­lion in debts and li­a­bil­i­ties, a sign of the gap be­tween his am­bi­tions and the re­sources to fund them.

Sheikh Khal­ifa bin Zayed Al Nahyan of Abu Dhabi, who threw the state hold­ing com­pany a US$10 bil­lion life­line on Mon­day, has no such con­cerns. He con­trols 8 per cent of the world’s oil and one of its big­gest sov­er­eign wealth funds. He’s also Sheikh Mo­hammed’s kins­man and, as Pres­i­dent of the United Arab Emi­rates, his boss. Abu Dhabi’s sup­port may come with a price that un­der­mines Sheikh Mo­hammed’s goit-alone vi­sion for Dubai.

‘‘ This isn’t no-strings-at­tached money,’’ said Jim Krane, au­thor of City of Gold: Dubai and the Dream of Cap­i­tal­ism.

‘‘This is the big chance for the Al Nahyan fam­ily to dra­goon its mav­er­ick cousins back into the union. Most of all, Abu Dhabi wanted to avoid the em­bar­rass­ment of Dubai looking out­side for its bailout.’’

Dubai is us­ing US$4.1 bil­lion of the Abu Dhabi money to pay off Is­lamic bonds of Nakheel, the Dubai World unit that’s build­ing palm tree-shaped is­lands off the emi­rate’s coast. The rest will help meet Dubai World’s costs as it ne­go­ti­ates with cred­i­tors.

The com­pany an­nounced last month it was seek­ing a six-month ‘‘stand­still’’ on its debt. Dubai’s even­tual bill may be higher than the US$26 bil­lion an­nounced on De­cem­ber 1.

‘‘It’s not go­ing to stop and go away,’’ said John Sfakianaki­s, chief econ­o­mist at Banque Saudi Fransi in Riyadh, Saudi Ara­bia.

‘‘There’s still debt that needs to be set­tled in 2010 and 2011.’’

Dubai must re­pay at least US$55 bil­lion in the next three years, Gold­man Sachs Group said yes­ter­day.

Abu Dhabi may in­crease its in­flu­ence over Dubai’s flag­ship com­pa­nies, such as Emi­rates Air­line and port op­er­a­tor DP World, said Emad Mostaque, a Lon­don-based Mid­dle East eq­uity-fund man­ager for Pictet As­set Man­age­ment, which over­sees more than US$100 bil­lion glob­ally.

They ‘‘are likely to be­come UAE strate­gic as­sets rather than Dubai strate­gic as­sets,’’ he said. Khal­ifa’s fa­ther, Sheikh Zayed bin Sul­tan Al Nahyan, was the prime mover be­hind the for­ma­tion of the seven-emi­rate UAE from a group of Bri­tish-al­lied sheikhdoms, and be­came the new state’s first Pres­i­dent in 1971. He died in 2004.

Abu Dhabi’s rulers may see cov­er­ing Dubai’s debt as ‘‘a small price to pay if in the long term the goal is in­te­gra­tion of Dubai into the fed­er­a­tion’’, said Christo­pher David­son, pro­fes­sor of Mid­dle East stud­ies at Bri­tain’s Durham Uni­ver­sity.

‘‘What Dubai has is for Abu Dhabi and what Abu Dhabi has is for Dubai,’’ be­cause the two sheikhdoms ‘‘are one and we will stay as one’’, Sheikh Mo­hammed told in­vestors at a Bank of Amer­ica Mer­rill Lynch con­fer­ence in Dubai.

That ver­sion of the re­la­tion­ship, never en­shrined in con­tracts, was taken for granted by the banks that lent Dubai bil­lions to fund Sheikh Mo­hammed’s projects, said Chris Turner, a for­mer di­rec­tor at Istith­mar World, Dubai World’s in­vest­ment arm.

‘‘It was just a gen­eral as­sump­tion,’’ Turner said. ‘‘It’s how busi­ness is done in Dubai. One does not push the gov­ern­ment for spe­cific pieces of pa­per.’’

Sheikh Mo­hammed’s pub­lic im­age sug­gests a man of action more than a pa­per-pusher. He of­ten spends week­ends racing horses at En­durance City, a desert course 30 min­utes from the city.

As he and his son, Sheikh Ham­dan bin Mo­hammed bin Rashid Al Mak­toum, speed away, an en­tourage of white four-by-fours drives along­side, the oc­cu­pants wav­ing and cheer­ing. The course has chalets for friends and fam­ily to eat and re­lax af­ter each race leg.

At Sheikh Mo­hammed’s Zabeel Palace in Dubai, a statue of white horses greets vis­i­tors and pheas­ants walk the grounds. The sheikh holds din­ners there to break the Ra­madan fast, crack­ing jokes and quot­ing his own po­etry to guests.

He of­ten at­tends thor­ough­bred auc­tions in New­mar­ket, Eng­land, to add to his sta­ble of race­horses, the world’s largest. In Oc­to­ber, wear­ing read­ing glasses, a blue cap and MBT train­ers, he flicked through sales cat­a­logues and spoke to his blood­stock ad­vis­ers, some­times wan­der­ing into the auc­tion ring when his agent was bid­ding.

Sheikh Mo­hammed’s re­turns were the low­est among the 18 big­gest buy­ers of one-year-old thor­ough­breds at United States auc­tions from 2004 to 2006, ac­cord­ing to data com­piled by the Blood-Horse Mar­ketWatch.

Sheikh Mo­hammed, 60, says speed is cen­tral to his gov­ern­ing style, and cites the in­flu­ence of his fa­ther, Sheik Rashid bin Saeed Al Mak­toum, who died in 1990.

‘‘I fol­low his ex­am­ple,’’ Sheikh Mo­hammed says on his web­site. ‘‘He would rise early and go alone to watch what was hap­pen­ing on each of his projects. I do the same. I watch. I read faces. I take de­ci­sions and I move fast. Full throt­tle.’’

Abu Dhabi’s rulers are more in­clined to ap­ply the brakes.

Sheikh Khal­ifa, born in 1948, is ‘‘more your typ­i­cal sphinx-like ruler who’s well-re­spected but doesn’t say much in pub­lic’’, Krane said.

He has be­come known in the world of phi­lan­thropy. Sheikh Khal­ifa is do­nat­ing an undis­closed sum to fund a car­dio­vas­cu­lar and crit­i­cal-care build­ing for Johns Hop­kins Hospi­tal in Bal­ti­more.

The gift came af­ter Johns Hop­kins treated UAE pa­tients, in­clud­ing mem­bers of the royal fam­ily, for two decades, and is ‘‘among the most sig­nif­i­cant Hop­kins has re­ceived’’, Hop­kins Medicine mag­a­zine Dome re­ported in June 2007.

Sheikh Khal­ifa’s younger brother, Crown Prince Sheikh Mo­hammed bin Zayed Al Nahyan, who hosted an April 2007 cer­e­mony for Johns Hop­kins of­fi­cials in Abu Dhabi, is a key de­ci­sion-maker there and more in­clined to em­u­late Dubai’s global glit­ter, Krane said.

Abu Dhabi is build­ing branches of the Lou­vre and Guggenheim mu­se­ums, and held its first For­mula One Grand Prix last month at a new desert race­track. Bey­once and Aero­smith played at the clos­ing con­cert.

Abu Dhabi’s res­cue helped pare losses on the re­gion’s stock mar­ket.

Still, Dubai’s bench­mark DFM Gen­eral In­dex is down 9.6 per cent, while Abu Dhabi’s in­dex has fallen 2.5 per cent, since the Novem­ber 25 an­nounce­ment.

Sheikh Mo­hammed said at the Mer­rill con­fer­ence on Novem­ber 9 any­one who doubted the sol­i­dar­ity of Abu Dhabi and Dubai should ‘‘shut up’’.

Two months ear­lier, he sparked a lo­cal mar­ket rally by telling re­porters at the Zabeel Palace: ‘‘We are all right, the UAE is all right, and we are not wor­ried’’ about debt pay­ments.

‘‘ In the last few months his state­ments have been mis­lead­ing at best, ac­tu­ally quite du­plic­i­tous,’’ David­son said.

‘‘How do you re­cover from that? I’m not sure you can. And I’m not sure Abu Dhabi wants him to.’’


FIRE­WORKS BE­GIN: Abu Dhabi’s sup­port for Sheik Mo­hammed bin Rashid Al Mak­toum (above) may un­der­mine his sin­gu­lar vi­sion for the state.

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