Although other Gulf political centres have been keen to play down the importance of Dubai, the effect of the emirate’s fall from grace on global financial markets shows just how influential it has become. GCC stock markets have lost more than $50bn since the announcement of Dubai World’s restructuring.
The Dubai government’s statement that its commercial arms do not enjoy state guarantees has destroyed its reputation in the capital markets. Worse, it has led investors to question assumptions that the governments of places such as Abu Dhabi and Qatar will bail out their own commercial operations if necessary.
Moody’s Investors Service has put Abu Dhabi’s blue-chip borrowers on review for downgrade, and the other ratings agencies are likely to follow. Dubai’s excess borrowing has driven up debt costs for all regional borrowers.
Other governments could avoid Dubai’s fate by providing explicit guarantees that they will treat the debt of the companies they own as sovereign debt. This is the only way to reassure investors, who have long been assured that they are taking on essentially sovereign risk. These problems, and the defaults of two high-profile conglomerates in Saudi Arabia that also borrowed money on the strength of their names, rather than of their balance sheets, mean the era of ‘implicit guarantees’ is over.
This will be a good thing for the region. Without sovereign support, businesses will be forced to become more transparent and have a robust business plan to get access to capital markets. Too often investment-grade ratings have been handed out to businesses that bondholders would avoid if they could see the underlying financial strength of the companies. Dubai has a painful restructuring to go through as banks and trade creditors struggle to get their money back. To avoid a repeat of the problem elsewhere, other governments must either clarify what support their commercial arms will receive, or make clear they are on their own.