The Dubai debt crisis of 2009 still haunts the UAE. Although the emirate has made significant progress on refinancing or restructuring its outstanding debts, it is still in a fragile position of rebuilding confidence.
Abu Dhabi had announced a raft of ambitious projects to transform the emirate and raise its profile globally. Although the government insisted its strategy was different, there were obvious similarities between what Dubai had done and what Abu Dhabi was planning to do.
The Dubai debt crisis gave Abu Dhabi pause. When the capital was forced to start bailing out its own indebted companies who had borrowed heavily to fund speculative projects, that hesitation spread. Questions are now being asked about how much government-linked firms were using their state-backing to get cheap loans, and what size the contingent liabilities on the government were as a result.
Clearly, Abu Dhabi’s government does not like the answer. The latest moves by the emirate to put in place a proper set of rules for borrowing by state-owned companies is a welcome sign. It shows that the emirate understands the risks to its balance sheet and wants to protect its reputation in the capital markets. Dubai’s debt crisis was partly a result of a sprawling array of government-backed companies and their subsidiaries all borrowing in the state’s name, but largely unchecked by it.
Investors will welcome the clarity this provides for Abu Dhabi’s finances. It may have less positive consequences for some entities that will no longer be able to rely on an assumption that the government will always bail them out.