The Gulf is starting to count the cost of the storm provoked by Dubai World’s decision to seek a standstill on some of its bank debt. The fallout in the form of greater reluctance among banks to lend and business to invest may even delay private sector recovery in some parts of the region.
Dubai depends on confidence that what it promises will be delivered and a deserved reputation for achieving apparently impossible goals. They include creating Jebel Ali port and free zone, Dubai Cable Company, Emirates and Dubai International Airport, Palm Jumeirah and Burj Dubai. Challenges that included the Iran-Iraq War; the 1986 oil price crash; the 1998/99 oil slump and the 2003 war for Iraq were addressed and overcome. For more than 30 years, Dubai has flourished in good and bad times.
Dubai’s friends say this track record is why they continue to keep faith with the emirate. But past successes may impinge on the emirate’s capacity to recognise the seriousness of the blowback from events at Dubai World. No tangible damage has been done. But Dubai’s image has been tainted. It is a development that could have a greater detrimental economic impact than physical harm.
The remarkable fact is that it was all provoked by a comparatively minor issue. A business owned, but not guaranteed, by the Dubai government announced on 25 November that it wanted to take a short-term debt service holiday.
This was not a default and Dubai World, as the Dubai government had made clear about a month earlier, is not a sovereign borrower. The amounts involved, we now know, were about $26bn in total and not $60bn. The debt most immediately in question, a Nakheel sukuk, is only worth $3.5bn.
The announcement of the Dubai World standstill, which surprised Nakheel’s creditors, was a blow. But it was the reaction that really hurt. Dubai and the UAE are, quite rightly, global stories, but this has a downside. The media will report speculatively unless there are facts and swift rebuttals, which there weren’t for almost five days after the standstill statement. It was interpreted as meaning, in effect, that Dubai World was defaulting. The company was seen as a sovereign borrower and all its liabilities were believed to be in jeopardy.
The reaction in global markets was compounded by fears that Dubai’s “default” could be the trigger for a wave of similar events in other emerging market economies, in the way the Latin American debt crisis in the 1980s was provoked by Mexico’s announcement that it could not pay its creditors. Emerging market fear, coupled with investors seeking to take profits before the year-end, led to global share markets losing more value in one day than all of Dubai’s debts in aggregate.
Dubai was at the centre of a perfect storm, but one that should not have started. At a time when trust in banks and business is low, financial difficulties in a company can quickly be seen as evidence of potential insolvency. Facts are the best way of dealing with speculation. The quicker errors and omissions are corrected the better.
No repetition is required of the case for Dubai to have an effective, long-term debt strategy. Banks also do not have to be told that wishful thinking is no substitute for hard-headed risk analysis.
Lecturing the media is also superfluous. But one fact is worth noting. Reporting done on the spot in Dubai and the UAE was at times aggressive. But it was also invariably more accurate, more timely and more useful than what emerged from outside the region.