When state-owned Dubai World announced it needed to restructure $26bn of debt at the end of 2009, all eyes turned to Abu Dhabi. The UAE capital stepped in and provided financial support, and in the process saved the reputation of state-owned companies across the region.

But now this is  being challenged by the recent downgrades of seven Abu Dhabi government-backed companies by Moody’s Investors Services. Sure, Abu Dhabi has the cash to finance all these firms, but the question is does it have the inclination. Dubai has already demonstrated that implicit guarantees are not worth the paper they are not written on, in the words of one bond analyst.

The Abu Dhabi government has so far been happy to voice strong statements of support for the firms, but is not ready to back that up with a sovereign guarantee.

Abu Dhabi has so far been happy to voice strong statements of support for the firms, without a sovereign guarantee

In some cases, it may not be necessary. Out of the seven companies, several could become viable long-term businesses, with their own cash flows that enable them to no longer rely on government funding to survive. Others are more focused towards ambitious real estate schemes, and that was ultimately Dubai’s downfall.

When the Dubai government understood developers such Nakheel and Limitless had little chance of generating significant revenue, it realised the best thing to do was to distance itself and treat them commercially.

There is nothing to stop Abu Dhabi from taking a similar stand in the future and investors want to know which firms will receive state support.

The downgrades may hopefully prompt Abu Dhabi to come clear. If it does not, its state-backed firms will see borrowing costs rise, as investors increasingly differentiate between the state and the company.