When Dubai narrowly avoided defaulting on its $110bn debt pile in 2009, it was a wake-up call for others in the region that had planned to ape the emirate’s growth model.
Rapid development fuelled by cheap short-term borrowing, based on an assumption that state-owned firms were guaranteed government support, seemed an attractive model in 2007. By the end of 2009, investors discovered there were no guarantees regional governments would bail out failing businesses.
Abu Dhabi wants state-owned companies to emerge as viable, long-term businesses
For Abu Dhabi, which had accumulated about $100bn-worth of debt on government-related entities (GREs) such as Mubadala Development Company, Abu Dhabi National Energy Company, and Tourism Development and Investment Company, Dubai’s crisis led to a bout of soul-searching. The Executive Council, Abu Dhabi’s governing body, has now taken steps to rein in these firms and regulate their plans.
While the UAE capital has the financial resources to bail out GREs, it wants to see them emerge as viable, long-term businesses. By telling the GREs they must aim to be investment grade on a standalone basis, and telling investors that the government is under no obligation to provide financial support unless it has committed to doing so, Abu Dhabi has shown it wants to bring an end to the moral hazard issue.
Separately, other new rules limit how much borrowing is allowed each year. The debt management office, an arm of the Abu Dhabi department of finance, has become a much stronger body in monitoring financial risks to the government from GRE debts.
State spending has already slowed as a result of the new conservatism that has gripped Abu Dhabi. This has disappointed many, who in the wake of Dubai’s crash had hoped that Abu Dhabi would pick up the slack. What is emerging instead is a much more cautious emirate, keen to avoid the mistakes of its neighbours.