Date : 27/12/2009
Author: Markaz Analyst Club
Or do recent events spell the beginning of a long road of decline for the emirate?
Recent events in Dubai not only threw regional and global markets into an, admittedly brief, period of turmoil, but they also raised very justifiable concerns regarding Dubai’s ability to maintain its growth trajectory in addition to furthering its ambitions to be the region’s hub of .. well, everything. Dubai dominated the news in late November with a possible default of Nakheel’s USD 3.5 bn Sukuk, in addition to the danger of this event triggering further defaults within its parent company, Dubai World, which sought a 6 month standstill on debt repayments. Abu Dhabi threw its maverick cousin a last minute USD10 bn lifeline, USD4.1 bn of which was to cover the Nakheel Sukuk, while the remainder was to cover Dubai World costs as it engages creditors in debt restructuring talks. Analysts around the world quite accurately predicted that Abu Dhabi would not let Nakheel default on the Sukuk; however, this did turn analyst’s attention to the debt restructuring of Dubai World which amounts to over USD 25 bn. Given the complexity of Dubai World’s structure, this process is expected to take a fair bit of time to complete.
On the question of whether Dubai will be able to redeem its pride as a tourism and financial hub of the GCC, Markaz analysts, by and large, have no doubt that the emirate will be able to recoup its position as the GCC hub, the question then becomes not one of “will it happen?”, but “when will it happen?”
Given that the emirate has spent the better part of the last decade aggressively building the infrastructure and regulatory environment needed to transform itself, far outpacing any other country in the gulf, it will remain, at the very least, the GCC’s tourism hub given that “there are no other alternatives so far and it will take a long time and lots of money for anybody else to build the requisite infrastructure” (Mr. Rajiv Bishnoi, Asst. VP, Oil & Gas). On the financial side, “Bahrain, Kuwait and Qatar have laid out their ambitions to become the regional financial centre as well, however, they lag behind Dubai considerably in terms of developing the necessary physical and regulatory infrastructure” (Mr. Ramadoss Venkateshwaran, Senior Research Analyst, Real Estate).
According to Mr. Venkateshwaran, the recent debt woes facing the emirate are “a hiccup in its growth path” and may provide opportunities “for others to advance and catch up.” Mr. Bishnoi posits that while it “may take a while – 5-10 years - for Dubai to regain its reputation as a financial hub. Bahrain and Qatar could now make a move to claim the sweet spot of GCC’s Markaz Al-Mali.”
Dubai’s infrastructure was brought up by nearly all analysts; there is the perception that Dubai has spent the decade “spinning gold from sand” with “no fundamental economic bases” (Mr. George Kunnumpurathu, Senior Analyst, Corporate Finance), and while it is certainly true that Dubai has no natural resources (read: oil) to fall back on, it does have a resource-rich, more fiscally conservative cousin who has repeatedly stressed that the UAE is one family, thus implying its continued support of the emirate. Mr. Venkateshwaran notes that this restructuring could provide Dubai with an opportunity to plug the gaps in its existing regulatory framework, an example of which are concerns that have been raised regarding the inadequacy of the current insolvency system in the emirate. Mr. Raghu Mandagolathur, Senior Vice President for Research notes that while “Dubai’s ambition to become a financial hub is certainly dented with the current events. Observers could easily see that Dubai was missing the market microstructure that is needed to become a financial hub like London or New York. Given the scale of problems currently on hand, Dubai will definitely be busy putting its house in order for the next couple of years before embarking on ambitious projects.”
Dubai’s ambitions have been blatantly transparent in the last decade; some might argue that this has neared a point of vulgarity in recent years with Dubai’s obsession with having the “largest”, “tallest”, and, in most cases, “most expensive” projects in the region. While many of these have been admirable, such as the Dubai metro and the various “cities” that the emirate has invested in, other projects like The Palm and World Islands have recently been cited with a slight tinge of mockery by regional and international press when reporting on Dubai, thereby highlighting that perhaps the emirate has “bitten off more than it can chew” with its “build and they will come” strategy. Henceforth, Dubai may need to abandon its “old model of “grow come what may”, and may be forced to switch to a “grow with caution” model in order to emerge out of the crisis wiser.” (Mr. Raghu Mandagolathur)
Mr. Bader Asadallah, Assistant Analyst, notes that the “nearly a year and a quarter after the beginning of the global crunch, Dubai’s prices remain high and unattractive even after large declines relative to cities around the world. “ He feels that an argument can be made that “Dubai took advantage of the global crunch, by not supporting the city from day one and allowing it to free-fall till prices reach attractive levels” which would entice foreign investors to return to the emirate. He opines that while “Dubai did not “want” or “plan” for recent events, the emirate may be playing up the debt woes in order to push valuations down to a level which would ultimately attract new investors,” though this would obviously come at the expense of current investors.
Dubai has been, and will likely continue to be, a global focal point and regional/international markets will continue to watch Dubai World developments with interest. The Markaz Analyst Club does not see the Dubai World debt restructuring as “the beginning of the end” for the emirate, however, it is likely to rein in Dubai’s ambitions to more realistic levels for the coming decade.
- Compiled and edited by Ms. Layla Al-Ammar, Investment Analyst, Research
The Markaz Analysts Club is an initiative launched by Markaz with an aim to collate the many varied and diverse viewpoints of Markaz analysts in an informal setting in order to share with the public the depth and breadth of analyst knowledge power within Markaz. On a periodical basis, a question concerning the topic/s of the day is posed to our analysts spanning various departments within Markaz (from Real Estate to Oil & Gas to Corporate Finance etc), these analysts’ responses are then compiled into a brief opinion piece for public viewing.
Tags: Dubai, Markaz Analysts Club
Current rating: 0 (0 ratings)