The wires still contain a lot of coverage on Dubai World’s “default” or delay on its $3.5bn bond due in mid December. Whilst this has effectively highlighted the cultural differences and issues that many forget impact emerging markets, and does hint at some worrisome back-room murk in the UAE in particular, it still seems a minor issue blown large in a world looking for bad news. In fact, you wonder whether the markets will actually see this as a postive in the near term. Simply put, Sheikh Khalifa bin Zayed Al Nahyan, and the political leadership of Abu Dhabi have an interest in making a point, but not in driving the collapse of their close neighbour. It’s worth remembering that Abu Dhabi controls 95% of the oil and 92% of gas in the UAE, producing approximately 3.5% of global oil supply from a population of ~860,000. They’re not short of income or cash – at US$ 875 billion, the Abu Dhabi Sovereign Wealth Fund is the world’s wealthiest in terms of total asset value. In total Dubai World is said to have debts of $59bn and Dubai itself ~$80bn. Sheikh Khalifa bin Zayed Al Nahyan himself has a net worth greater than $20bn. Abu Dhabi will step in at some point, having taken their pound of flesh in Emirates Airlines or some other high-ticket asset and a lot of political capital. What has spooked markets is the potential for large off-balance sheet vehicles hiding much more debt. We will know soon.
More than anything it does highlight the growing threat to sovereign credit ratings. As Mohamed A El-Erian, CEO and co-CIO of PIMCO, the investment management firm said: “Investors should treat last Wednesday’s announcement as an illustration of the lagged financial effects of the global financial crisis…Let Dubai be a reminder to all: last year’s financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.” What would those countries without oil production and a sovereign wealth fund do? Greece? Ireland? Latvia?
And of course, given the historical connections between the UAE and the UK, British Banks are at the heart of the exposure: according to Bank for International Settlements data, Britain has just over $50bn of lending exposure to the UAE – more than half of Europe’s entire holding of debt related to the country and about five times the US’s (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6678148/Dubai-an-emirate-in-crisis.html ).
— for more on Dubai’s “darker side”:http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai-1664368.html