While the whole Dubai crisis started with a request to suspend debt repayments by the state authorities it has mushroomed and snowballed into something which has the potential to impact upon the worldwide money markets and worldwide stock markets. However, the story is developing at lightning quick pace at the moment with hopes that the Abu Dhabi authorities will step in and save the day. So will Abu Dhabi come to the rescue?
What does Abu Dhabi have to offer Dubai?
Even though both Abu Dhabi and Dubai are part of the United Arab Emirates, Abu Dhabi is by far and away the richer state with one of the highest gross domestic product figures per capita in the world. The state has 9% of the world’s proven oil resources, 5% of the world’s natural gas resources and even though there is some overseas investment in the region, 95% of the oil resources and 92% of the gas resources are owned by the state. Therefore Abu Dhabi is in a far stronger position than Dubai which is now being dragged down by the estimated $80 billion owed by the ruling family to banks and investors.
Why would the Abu Dhabi authorities want to help?
Even though Dubai is struggling to survive at the moment and is ultimately going to be a very different animal next year to the one we see today, there is no doubt there are assets worth saving in Dubai and the economy is potentially a very lucrative investment in the longer term. As a consequence, there have been rumours for some days that the Abu Dhabi authorities will be looking to invest in the region not only for their own direct benefit but also as a means of supporting the region, which is in danger of being swamped by negative comment and negative sentiment simply because of the ever growing debt accumulated by the Dubai authorities.
Is Dubai now dead in the water?
There is some debate as to whether to Dubai will recover in the short to medium term or indeed is the region holed below the waterline and unlikely to attract the attention of overseas investors for many years?
Ultimately, the state of Dubai has undergone a massive change over the last decade, a change which many believe was pushed along at a pace which was unsustainable and ultimately risky, and the Western influence is there for all to see. However, the infrastructure of the region has expanded dramatically, business in the region (non-oil related) has also mushroomed and for many years overseas investors were literally paying any price to get exposure to the Dubai property market and the Dubai economy as a whole.
Against this background, many people believe there are many assets and many services worth saving and ultimately once the “excess fat” has been stripped from the Dubai economy and the Dubai property market in particular, there should be a very firm base on which to grow the economy in the future.
What can the Abu Dhabi authorities provide?
The simple answer to this question is cash, cash, cash!
The Dubai state family needs in some way to agree a new debt repayment plan for the future and for this they need some kind of collateral to put down on the negotiating table. If they were able to agree a rescue package with the Abu Dhabi authorities, a state which is far richer than Dubai itself, this would give bankers have confidence to sit around the negotiating table and start to look ahead to the future and what can be done to save the best of the Dubai economy.
However, there is no doubt that various areas of the Dubai economy have overinflated in the short term, with the property market a prime example, and there needs to be some trimming of the fat to take the economy back down to the bare bones. As a consequence, if the Abu Dhabi authorities come forward with a rescue plan it is highly unlikely they would bailout the Dubai authorities lock stock and barrel and more likely they will “cherry pick” the best assets and the best investments from the struggling economy.
As a consequence, it is highly likely that we will see more pain in the short to medium term as the Dubai economy is basically stripped back to the bare bones on which it should be possible to stabilise the economy and business arena and start to look ahead to the future. There are numerous large ongoing projects in the region, many of which literally put Dubai on the map, which will never be finished and are literally eroding before our very eyes. This is the excess fat which needs to be stripped away to allow the foundations of the Dubai economy to emerge to a new dawn.
When would any rescue package emerge?
There is no doubt that time is of the essence and if the Abu Dhabi authorities are serious about saving Dubai then they need to step forward as soon as possible. The longer the situation drags on the more it will impact upon the worldwide money markets and the worldwide investment markets and more importantly for the Abu Dhabi authorities, the region in and around the United Arab Emirates.
Not only is there the opportunity to pick and choose the best assets from the Dubai economy but there is also the need to act as quickly as possible to maintain the reputation of the area. It seems unlikely that this situation will be allowed to drag on for much longer because ultimately if the Abu Dhabi authorities do not step forward then we could see some form of western rescue package placed on the table, something which would be against the wishes of the vast majority in the Dubai region.
There is no doubt that the Dubai authorities have been in talks with the Abu Dhabi ruling family and ultimately it will be a shock if at least no part rescue package was placed on the table in the short term. There is a need to take away the “heat” from the region in the short term and this will only happen once the Dubai situation has been stabilised and outside investors effectively take control, at least in the short to medium term.
This situation will develop very quickly over the next few days and we can expect a strong flow of news over the days and weeks ahead.