Monday, November 30, 2009

Impact from the DW issue

I treat this blog not only as somewhere where I can express my own opinions but also as a place for conversation. I start the conversation by posting something, people join in by leaving comments, I and others respond and so the conversation goes on.

This post is an example, I'm continuing a conversation by responding to questions left on my last post about the Dubai World debt issue and the PR surrounding it. I started to answer in the comments box but it was really too long as a comment so I decided to turn it into a new post.

The question was: How do you think this will impact Dubai in the next 3 months and also, if this has just come out now, what other stories do you think will start to 'appear' that have remained hidden so far?


First a disclaimer: Predicting the future is nothing more than a guess. Whoever does it, however expert they are, it's just making a personal guess as to what may happen.

I've been asked what I think, I could be right or I could be wrong, it's only a guess, but here goes:

Impact over the next three months? Three months is a very short period. My thoughts are that we won't see much impact down here at street level in that time. Unless you work for one of the DW companies, that is. If you do then you can expect even more changes than you've experienced over the past year. But for the rest of us, no.

There is currently bad publicity internationally for Dubai on a massive scale and I'm sure that will continue, but it relates to business so I don't see it affecting, for example, tourist arrivals.

As for the financial world, after the initial and inevitable panic, and when eventually the information vacuum is filled by official, meaningful, believable statements from the authorities here, things will settle down. It will take a long, long time for confidence to be restored but it will be eventually.

In the real economy, as a result of the global downturn we, like many other places, already have economic slowdown, redundancies, companies closing, invoices not being paid resulting in huge cashflow problems, a property price slump, tighter credit conditions, less spending. I don't see the DW issue making any difference to that in the short term.

The Feds are in damage control mode, taking action to limit impact on the economy in general.

There's been the entirely expected run on the local share markets this morning, when they re-opened after the Eid holiday. Dubai’s lost 7.2% late morning, the biggest drop since November 2008, and Abu Dhabi’s index was down 8.2%, the most since May 2006.

Big drops, but we've seen it before. They'll bounce back.

The Feds have announced support for the banks, the companies most at risk from the Dubai World problem, having set up a special liquidity facility for local and foreign banks operating in the UAE. They've also stated that they will support selected Dubai companies, without naming them. I assume it will depend on which ones they think are viable.

There are obviously high-level meetings going on between Federal and Dubai government officials so I expect more measures will be announced if they're felt necessary as the Feds get to the facts.

Put into perspective, ignoring the terrible handling of the issue in Dubai over the last year culminating in the new PR disaster, the root of the issue is that a company is planning to restructure its debt. That's normal business practice and if it had been handled competently we wouldn't have the problem we now have.

So in the next three months, which was the question, I don't think we'll experience any impact specifically from this Dubai World issue.


To carry on the thought, over the longer term I think the impact will be positive.

What I expect to see is a stop to the overdevelopment, especially of farcical projects which were simply not viable and were nothing to do with commerce, the lifeblood of Dubai. They're what caused the problem in the first place.

The companies in DW group will be reorganised now by someone who knows how to do it, and who according to the reports will be given the authority to carry out whatever's necessary. I assume there'll be payment of overdue invoices, a restructuring of debt and the companies left in the group will be commercially viable.

In a more general sense I think that instead of focusing on property and the speculation that goes with it the focus will go back to Dubai's tradition of trading based on its location, plus the new tourism industry. That should have been the focus for Dubai's latest development boom; they should have built the airport, the commercial cluster 'cities' and at least parts of Dubailand but not Palm Deira, Palm Jebel Ali/Waterfront, The World, the Arabian Canal for example. They didn't, they got carried away and lost focus but I'm sure it will now get back to those basics.

Politically, I think there'll also be far less independence in future for Dubai, and the other emirates, with a much stronger federal government.

On that subject it'd be interesting to know whether the complete lack of comment from Dubai authorities is voluntary head-in-the-sand or whether the Feds have said 'keep quiet and leave it to us'.



The other question was: Any other hidden stories? The normal way of dealing with bad events in this region is to do it behind closed doors, sort out the problem without letting anyone know there even was a problem. Maybe there have been others, will be others, which will be dealt with in that traditional way.

But I can't see another similar problem to this Dubai World debt thing appearing.

It's the big one. It involves the biggest companies, government related or owned, responsible for the biggest, most-publicised projects.

For months the authorities have been saying there would be no problem with meeting the commitments, the markets have been led to believe that governments were underwriting the debts. Then an out-0f-the-blue announcement that there was problem. And of course the realisation that the government had never actually said that it would guarantee company debts.

I don't think there's another one to spring on us.

20 comments:

Matt said...

Seabee

I agree with most of your observations. Here's my concern.

3.5bill is a relatively small amount considering the Emirates 80bill debt, 60bill of which is DW. Why would you risk the pounding that Dubai has received, the lack of confidence this will have in the gov't and also the banks S&P ratings? I don't understand why this has taken (to your point in a blog a few days ago) 14 months to happen. My concern is this is actually the tip of the iceberg. Hope I'm wrong, but concerned I could be right.

the real nick said...

Seabee,

I don't think there's another one to spring on us.

Are you sure? According to the 'Bank of International Settlements' a total of $102.65bn is owed by Dubai to Western banks alone, of which 50.2bn to Britain, 11.3 to France, 10.64bn to Germany, 10.62bn to the USA, 8.96bn to Japan, 4.56 to Switzerland, 4.46bn to the Netherlands, and 1.91bn to Austria. This alone is way more than the figuires of $80 to $90bn that are being bandied about and this does not include any debt to Abu Dhabi investors, let alone the Central Bank.

There is a lot more lurking in the shadows...

Anonymous said...

Matt I'm afraid you are right in your observation that this is the tip of the iceberg the SH1T is on the way and trust me Dubai will be history soon enough.

Someone once said,'You can fool some of the people some of the time; all of the people some of the time; but not all of the people all of the time'.

This sums up Dubai in a nutshell.

Dubai was always an empty vessel but they sold it by paying a few useless brits a lot of money to generate hype.

Matt said...

@Anonymous. Chill. Don't go too far.

Dubai will not and cannot sink. It has to change its business model and go back to what made it a strong city - trade.

The property balloon was unsustainable and had to burst. Unfortunately, the gov't lacked foresight and over invested in something they - inevitably - couldn't control. They've been bitten badly and will rue this for a long time. But inevitably they will overcome what has occurred whether that be now, in 5 years or 10.

But Dubai is not "an empty vessel" and it won't be "history". History is being re-written as we type, but the city will still be here in the future in one way or another. I just hope my rent goes down!

Terry said...

Dubai isn't going anywhere. It's injured and needs some heavy duty bandaging - but it will get back up. I have lived in Dubai for 14 years and have been in and out since 1982. Dubai is my home!

My only concern since last year has been the silence of the powers that be. When leaders in countries throughout the world spoke to their countrymen about the recession and what they were doing to solve it - nobody here said anything. It's all good to act like the problem is not there, but we all knew there was.

And what do we have now? A huge PR disaster. People are running around all over the world saying Dubai is finished. Dubai is a ghost town. People are living on the streets! For those of us that live here, we know this is bull! But we need some major crisie control and I hope the powers that be doing something about it FAST!!!

Anonymous said...

I'm wondering if they're prepping for "The Big Bath". You know, when a faltering company releases every possible bit of bad news at once to take that one time hit and then rebuild. I wonder about the solvency of the banking system and this will be a test as to whether the other Emirates will simply write Dubai a check or if they'll squeeze some sort of concessions out of them.

How do you think this will impact Dubai in the next 3 months

Dubai slumps further on the heels of an overstock of housing and now financial uncertainty. Dubai is not going anywhere. They're a hub for a billion people.

Maybe this will be the thing they need to open up the books and perhaps start enforcing laws to prevent fraud (i.e. real estate scammers) and work out some of the infrastructure problems (like sewage).

if this has just come out now, what other stories do you think will start to 'appear' that have remained hidden so far?

Probably that they're very highly leveraged and the amount of housing stock they have is very much outstripping supply. Markets hate uncertainty and the lack of transparency is not helping them at all. I expect much will remain hidden as showing all their cards might be too risky.

YMMV.

Sign me,

Distant Observer

Anonymous said...

As pointed out by a blogger, Sheikh Mo did make some very lofty promises to investors back in 2003. A direct quote from his speech:

"I guarantee that your money will be invested in carefully studied projects. I want to be frank with you - I have the courage to take decisions and to bear the responsibility for the consequences."

Dare I suggest that His Highness is reneging on his promises.

More details on the blog:
http://secretdubai.blogspot.com/

Or a direct link to the speech:
http://www.sheikhmohammed.co.ae/vgn-ext-templating/v/index.jsp?vgnextoid=641483b079d44110VgnVCM1000003f140a0aRCRD&vgnextchannel=b0b24c8631cb4110VgnVCM100000b0140a0aRCRD&vgnextfmt=default&date=1066750294923&mediatype=EVENT

Anonymous said...

Dubai is not a PR Disaster what you guys are not aware of is that for over a year the Dubai Government hired a UK firm to stage a cover up. Unfortunately, even this firm was a victim as business Ethic is non existent and stealing is the name of the game.

In Dubai no one milks the cow they kill it and when they need milk they try milking the bull and the end result is what we have BULLSHIT and more BULLSHIT.

Anonymous said...

The link above, to the Sheikh's speech is incorrect. It should have been:

http://www.sheikhmohammed.co.ae/vgn-ext-templating/v/index.jsp?vgnextoid=641483b079d44110VgnVCM1000003f140a0aRCRD&vgnextchannel=b0b24c8631cb4110VgnVCM100000b0140a0aRCRD&vgnextfmt=default&date=1066750294923&mediatype=EVENT

Staring at My Useless Diploma said...

Yes, like Matt and the other pointed out the underlying concern seems to be, "Okay, they've JUST sprung this on us while pretending everything has been hunky dory... just how much more rubbish have they swept under the carpet?"

And am I the only one who's curious as to what
Hervé Jaubert has to say about this? A vague recollection or dawning realization of sorts?

Matt said...

went to look at http://secretdubai.blogspot.com/ but cannot. no access from UAE. what a shock.

Seabee said...

Nick, that's not one to spring on us, the general opinion has long been expressed that the real figure is much more than the official $80 billion. To have it confirmed, if it ever is, won't surprise anyone.

Anonymous said...

The leaders have commented. Two weeks ago Shk Mohammed told a briefing that anybody doubting the relationship between Dubai and Abu Dhabi should "shut up".

Very constructive.

Next he'll be saying that anybody who doesn't like it here "should go home".

Last night the finance chief of the government said that although the government owns the companies, the debt is a commercial problem and nothing to do with the government.

Pardon?

In the rest of the world governments went to the aid of stricken companies that were genuinely non-government to stave off complete meltdown of the global economy.

But here apparently it is nothing to do with them, even though they pulled in billions in foreign and institutional investment because they were promoted as government companies and therefore seen as a safe bet.

This naive reaction, and the inevitable blaming of the media (and everyone else) for the problem just makes Dubai a laughing stock in the rest of the world.

It will be a very long time before instituional investors have any confidence to come back into Dubai.

This one will run and run.

Anonymous said...

The latest joke is that the Dubai Government will put up their flagship carrier Emirates Airlines' as collateral for the debts they owe.......Hello! everyone....is this stand up or what.

EMIRATES doesn't even own the planes it flies they are on an operating lease and are in essence rented with borrowed money. Obviously the balance sheet will look good. No Assests i.e. planes = No Liabilities i.e. debt

This way they can fool a few more banks and financial institutions into thinking that they are financially sound.

EMIRATES Airlines' was in hot water long before Dubai Government i.e. Dubai World debt issue surfaced.

These people are not business savvy they are just common criminals.

Ali said...

Anon above has a good point. What I personally dont understand is how so many people could have no idea of reality, or pretend to have no idea of reality, juding by many online forums and the local media.

The main theme is that we should congratulate the leaders for the wise vision, and that anyone even mentioning Dubai has a problem is just jealous.

Lindia Heard, the full-time apologist for Dubai claims today that Dubai has no debt problems and Brits saying otherwise are just jealous they cant work in an utopia like Dubai.

Why do we have to come to a handful of blogs to read anything near the truth?? i.e. Dubai wont collapse but is in a bit of trouble .

Anonymous said...

Nice archive material from the Economist..
http://www.economist.com/world/middleeast-africa/displayStory.cfm?story_id=15006764&source=hptextfeature

Seabee said...

Anon@1.38 Thanks for that interesting archive piece. Those were the days!

Its comments on Dubai forty years ago is what I was talking about in the post, the trading/commercial basis of Dubai that's been forgotten in the mad rush to build ridiculous real estate projects.

purple said...

Great archive article.. I'd love to get back the Dubai of the late 80's... ..when Sana in Karama was still a landmark.. when Ghurair Centre was 'happening' and going to Spinneys in Jumeirah was an event in itself.. I used to live in Abu Dhabi then and would occassionaly travel to 'trendy' Dubai.. we kids would get chocolates for being the first to spot the Trade Centre building heading in from Jebel Ali... those were the days..

Pete from Hull said...

I fear the Real Nick is right. The BOIS number of 102 billion$ is on balance sheet debt declared by the banks. This does not include off-balance sheet debt which could be the same again - a long way from 80 bill$.
The other point that strikes me is that Dubai/UAE's companies ability to raise debt will get harder and more expensive post this incident and it will be some months to come before this effect becomes apparent.
Most of all and I doubt it will happen, The Fed versus Emirate issue need sorting to start bringing clarity to decision making and about who is in charge. We all know AD has the money but it has to take charge in a transparent and orderly fashion.

Seabee said...

Agreed Pete, but as I said in response to Nick, that won't come as a surprise. A much higher figure than the official one is just about universally expected and is being openly and regularly discussed.

The problem isn't the debt restructuring (of a relatively small amount) but as I've been saying in these related posts it's the damage to Brand Dubai that the mishandling has caused. The ability to raise debt that you raise is one effect of that.