Share prices sink to lowest level in months amid concerns over emirate’s finances.
Al Jazeera’s Dan Nolan, reporting from the Gulf Co-operation Council summit in Kuwait City, said that while it had been expected that Abu Dhabi would help its Emirati neighbour, the scale of the assistance was a surprise.
‘Nothing for Abu Dhabi’
“Nobody was expecting that this $4.1bn Islamic bond that was maturing today would actually be paid in full,” he said.
“Abu Dhabi said just a few days after this story broke that they would not be writing any blank cheques, and that they would be choosing when and where they wanted to assist.
“What has been announced so far has not involved any obligations on Dubai to Abu Dhabi. Abu Dhabi will get nothing from this, other than stabilising Dubai when it was needed.”
“Dubai World is really a model of overambitious building. When the financial tsunami hit the global markets, there was really no market for expensive apartments and these massive office buildings [in Dubai]”
Francis Lun, general manager of Fulbright Securities
Sheikh Ahmed bin Saaed al-Maktoum, the chairman of the Dubai Supreme Fiscal Committee, earlier said in a statement: “The government of Abu Dhabi has agreed to fund $10bn to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World.”
“As a first action for the new fund, the government of Dubai has authorised $4.1bn to be used to pay the sukuk [Islamic certificate] obligations that are due today.”
Christopher Davidson, a senior lecturer at Durham University’s school of government and international affairs and a writer on the UAE, said that “traditional politics” was behind the agreement between Adu Dhabi and Dubai.
“Some kind of negotiation or an agreement was in place, but of course it took place behind palace doors,” he said.
“The general public and the investor community will never really understand what happened, but as far as they are concerned, the UAE is now acting as one.”
Dubai’s stock market opened up 10.10 per cent on Monday, after news of Abu Dhabi’s grant was announced. Abu Dhabi’s market was trading about seven per cent higher.
The yen fell sharply against other currencies on the news, while the US dollar increased to 88.90 yen and the euro also jumped to 130.43 yen.
Hong Kong’s Hang Seng index rose in the last minutes of morning trade to finish in positive territory, while other markets across Asia also received a boost.
“We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices,” al-Maktoum said in the statement.
“Dubai is, and will continue to be, a strong and vibrant global financial centre. Our best days are yet to come.”
But Francis Lun, general manager of Fulbright Securities, told Al Jazeera that Dubai had to re-examine its projects in order to make them viable.
“Dubai World is really a model of overambitious building. When the financial tsunami hit the global markets, there was really no market for expensive apartments and these massive office buildings [in Dubai],” he said from Hong Kong.
|Dubai has struggled to complete some of its building projects amid the financial crisis [AFP]|
“Who will live there, who will do business there? The problem is that maybe they will have to scale down their projects massively. I think it will take years, if not decades, for the buildings to be completed and fully occupied.”
Any excess funds from Abu Dhabi’s grant would help cover Dubai World’s obligations up until the end of April 2010, the statement said.
Dubai has announced a bankruptcy law that can be invoked if Dubai World and creditors fail to reach an agreement on debt maturing in the future.
“Dubai will announce a comprehensive reorganisation law, a framework that is based upon internationally accepted standards for transparency and creditor protection,” al-Maktoum said in the statement.
“This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.”
The assistance provided to Dubai by Abu Dhabi, the largest member of the United Arab Emirates federation, is an attempt to stabilise regional markets and reassure potential investors that the UAE as a whole is on a sound financial footing, Al Jazeera’s Nolan said.
“Since this news [of Dubai World’s defaults] first broke a few weeks ago, Abu Dhabi’s stock markets have been hammered just as badly as Dubai’s.
“All of the Gulf nations have been affected. At the Gulf Co-operation Council summit in Kuwait there will be some happy faces, because they have a vested interest in Dubai – not only in terms of their own stock markets, but also because of the future financing of their own projects that are in the pipeline.”