BT : Its DNA is intact but Dubai's reputation is in tatters

Business Times - 03 Dec 2009

COMMENTARY
Its DNA is intact but Dubai's reputation is in tatters

By VIKRAM KHANNA

(SINGAPORE)

HERE'S how not to communicate you're in a financial hole: Put out a terse statement asking for a six-month payment moratorium on US$60 billion of debt that you owe, and then promptly close shop for a four day public holiday.

That is what Dubai World did last Wednesday. It scared the daylights out of the markets and, in the absence of any further information, triggered all manner of paranoid speculation. Is Dubai itself going bust? Will there be contagion? Who will be next? Can already weakened banks withstand this?

After the emirate finally emerged from its holiday this week, Dubai's government made clear that it will not stand guarantee for the debts of Dubai World, even though the latter is a state-owned conglomerate. Thereafter, Dubai World, which has operations spanning property, ports, infrastructure and much else, tried to reassure everyone that things actually aren't so bad. It revealed that it plans to restructure only US$26 billion of its debt. Moreover, many of its assets are on a 'stable financial footing' such as Dubai Ports World, the Jebel Ali Free Trade Zone and the investment arm Istithmar, and these would not be part of any deal; the restructuring will apply only to the dud assets, mainly property. Meanwhile, Dubai's oil-rich fellow emirate of Abu Dhabi indicated, ever so cautiously, that it will consider providing financial support for Dubai World, but only on a 'case-by-case basis'.

No systemic threat

What does one make of this confusing, opaque mess?

The good news is that Dubai's woes pose no systemic threat. After the bailouts and workouts we have witnessed over the 15 months, a restructuring of US$26 billion, or even US$60 billion, is manageable. This does not, of course, mean there won't be pain. High on the list of the losers will be some banks, mostly British, which lent with wild abandon during the heyday of Dubai's construction boom - probably the biggest in the region since the building of the pyramids.

Some bankers are reportedly furious, indicating they were conned into believing that they were covered by a sovereign guarantee - even though this was not explicitly spelt out. But as with other instances of over-exuberant lending, the bankers have only themselves to blame.

They are not the only losers, however: Construction, engineering and consulting firms are also stuck with unpaid bills; UK engineering firms alone are owed some £pounds; 250 million (S$575.2 million). But the most innocent victims are the hundreds of thousands of construction and other blue-collar workers, mostly from Asia, who have been rendered jobless overnight, with sometimes months of back wages unpaid. Thousands of well paid expatriates too, will take a hit. A lot of unhappy people will be leaving Dubai, never to return.

What of the debt restructuring itself? The Dubai government's refusal to make good the debts of Dubai World is wise. The loans were clearly commercial deals, whether or not bankers believed otherwise. However, Dubai World's attempt to ring fence its good assets and try to limit the restructuring to only those loans related to property sounds like a non-starter. More likely, in the complicated negotiations that will follow, everything will have to be put on the table. So while bankers may take some haircuts, Dubai World may also have to sell some of its good assets - and there's plenty to choose from, ranging from golf courses to indoor ski resorts, to port facilities to stakes in blue-chip companies. From all indications, Abu Dhabi, too, will demand a quid pro quo for its financial support - which may include taking control of some of the assets owned by Dubai World.

Damage repair

When the mess is finally cleaned up, Dubai World could be a shadow of its former self. But that won't be the end of the story. Dubai itself will have a lot of work to do to repair its reputational damage. It will have to put in place greater accountability, corporate governance and prudential controls - all of which have, as is now obvious, been in short supply. It will also have to rein in some of its extravagant ambitions - no more pharaonic projects, even if for no other reason than that there are unlikely to be bankers available to finance them, at least for a while.

Eventually, however, Dubai will be back as a vibrant business and financial centre. It has the location, it has the connectivity and it has the DNA that no other city in the Gulf can come close to matching.