Confidence crisis threatens Dubai recovery

01 July 2010

Nakheel’s debt deal is good news but more needs to be done to fire up economy

Quicker than many had expected, Dubai developer Nakheel is approaching a deal with its trade creditors. More than $1bn will be paid out to contractors and suppliers in July. The company is also hopeful that by the end of the month it will have a deal with its banks. Later in the summer, it hopes to settle issues with its trade creditors by issuing them a sukuk (Islamic bond) for the rest of the cash it had failed to pay them.

Perhaps more importantly though, Nakheel now plans to restart work on six stalled projects. For the Dubai’s embattled economy, this will be good news. The drying up of construction activity and inability to pay outstanding bills to contractors means growth has stagnated in the emirate. A second year of recession is predicted by many analysts. Restarting projects will be key to getting Dubai’s economy growing again. But many contractors fret about whether they will face similar payment issues in the future.

The difficult outlook for the emirate is reflected in the local stock exchanges, which failed to be lifted by the positive news from Nakheel. A downgrade of another troubled state-owned firm, Dubai Holding Commercial Operations Group (DHCOG), also weighed on sentiment. Its parent, Dubai Holding, is also facing a debt restructuring and a backlog of unpaid bills to its trade creditors.

The pace with which Dubai World and Nakheel are reaching accord with those they owe cash to is comforting. But confidence is still shaky. Much more will have to be done to reassure businesses working in the emirate that payment agreements will be honoured in the future.

Otherwise, Dubai may find that its economic rebound, already delayed until 2011, is put on hold for even longer.

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