DUBAI, Nov 1 (Reuters) - The cloud over Dubai’s financial future after the Dubai World debt crisis is the overriding risk to watch in the United Arab Emirates.
Added to that are worries about an escalation of Iran’s nuclear dispute with Western powers, a long-running territorial row with Iran and Islamist radicalism.
The United Arab Emirates economy is expected to grow by 2.4 percent this year, the slowest in the Gulf Arab region, weighed down by large debts at many of Dubai’s state-linked firms.
Dubai’s finances sparked concern after the global financial crisis burst a property bubble, shelving multi-billion-dollar projects and triggering thousands of job cuts. The UAE economy was estimated to have shrunk 2.1 percent in 2009.
A $1.25-billion Dubai bond issue in September marked the emirate’s return to debt markets since its November 2009 crisis. The four times oversubscribed issue challenged predictions that Dubai would have trouble tapping credit markets as the emirate and its companies climb out of a $100 billion-plus debt hole.
The emirate shocked markets when Dubai World [DBWLD.UL], one of the Dubai government’s three flagship holding companies, said last November it would seek a delay in repaying $26 billion of debt linked mainly to property units Nakheel [NAKHD.UL] and Limitless, sending global markets into a dive.
Neighbouring Abu Dhabi, the seat of the seven-member UAE federation and home to most of its oil wealth, lent Dubai $10 billion, helping to avert default on a bond issued by Nakheel.
Dubai World, with debt of around $39.9 billion, reached a formal agreement in September with 99 percent of its creditors by value to restructure some $24.9 billion of liabilities.
The company is prepared to sell prized assets including previously ringfenced ports firm DP World DPW.DI to try to raise as much as $19.4 billion to repay creditors, a document presented to creditors in July showed. [ID:nLDE67O15E]
But investors are still worried about debt troubles at Dubai Inc, as the network of state-linked firms are known.
Just days after the Dubai World agreement, Dubai Holding, owned by Dubai’s ruler, requested a second delay for $555 million in loan repayments until Nov. 30 [ID:nLDE6890CV]. The company has debt obligations estimated at $14.8 billion.
Private equity firm Dubai International Capital, a unit of Dubai Holding which has around $2.6 billion of debt, requested in September to delay a $1.25 billion loan for the second time, requesting to repay at the end of November. [ID:nLDE68E19I].
Dubai’s debt crisis has strained relations between Dubai, known for extravagant real estate projects, and the wealthier but more staid Abu Dhabi. The two emirates have shared the financial and political reins of the UAE since its inception in 1971, but further assistance from Abu Dhabi could boost its role, possibly upsetting a delicate power balance.
What to watch:
- Will Dubai’s government-linked firms be able to make their debt repayments?
- Will Abu Dhabi have to intervene further to meet any Dubai debt obligations? Abu Dhabi would prefer Dubai stand on its own and wants to contain further spillover from Dubai’s debt into its economy and that of the federation.
Lack of transparency and worries about government guarantees for the debt of massive state-linked companies will make investors wary about keeping their money in the country.
Dubai needs to take concrete steps to improve transparency and communication after initially leaving investors in the dark and making overly optimistic and confusing statements.
Whereas other Gulf states funded growth with proceeds from soaring oil prices, Dubai borrowed to invest through a network of state-linked conglomerates that offered limited transparency.
Creditors lent to state-linked Dubai companies on the implicit understanding that they would be backed by the Dubai government only to find there were no such formal guarantees.
Dubai World’s troubles have raised fears among investors that other state-linked firms could also face problems. Moody’s downgraded seven Abu Dhabi state-linked firms in March, citing a lack of explicit state support in the wake of Dubai’s crisis.
What to watch:
- The possibility of debt problems emerging in other state-linked units, which could deter investment.
The United Arab Emirates, the world’s third largest oil exporter, has been spared al Qaeda attacks. But as a transport hub and business and tourism centre aligned with Western interests, Dubai could make an attractive target for militants.
Last year, al Qaeda’s Yemeni and Saudi branches merged into a Yemen-based regional arm, which claimed responsibility for a failed plot to bomb a U.S.-bound plane in December.
The group has threatened attacks on Westerners in the region and seeks the fall of the Saudi royal family.
U.S. officials have also said the group, al Qaeda in the Arabian Peninsula (AQAP), was likely behind a plot in October to mail two parcel bombs from Yemen on U.S. bound planes. One of those bombs was seized in Dubai and the other in Britain.
The UAE does have tight security that may have helped it ward off attacks until now, but as an old regional trade centre it has had an open door to people from many walks of life. This has also made it vulnerable to international score-settling.
Earlier this year a Hamas leader was killed in a Dubai hotel room, in a hit widely blamed on Israel.
What to watch:
- Any expansion of AQAP attacks in the region could mean other Gulf countries, including the UAE, are at risk. A serious attack could unsettle markets, particularly energy.
The Gulf Arab region, of major strategic value to Western powers, is concerned about being drawn into any armed conflict if a nuclear row between Iran and Western powers escalates.
Dubai’s close economic ties with Iran have also drawn scrutiny from Washington, which has pushed hard for U.N. sanctions on Tehran for refusing to halt its atomic activities.
U.S. officials regularly travel to the UAE to urge vigilance against Iranian banks and businesses based there, and the UAE central bank has asked financial institutions to freeze any accounts belonging to dozens of Iran-linked firms.
Dubai is home to around 80,000 Iranians and thousands of Iranian businesses. Last year, Dubai’s re-exports to Iran -- goods coming from Europe, Asia or elsewhere and then sold on to Iran -- rose 4.8 percent to 21.3 billion dirhams ($5.8 billion).
The UAE’s extensive purchases of U.S. arms and facilities it offers to the U.S. military could make it a potential target for revenge if the nuclear dispute spirals into a military conflict.
What to watch:
- Any signs the Iran nuclear dispute could turn to a military conflict. That could deter outside investors, hit global and local markets, and push oil prices sharply higher.
- More sanctions on Iran, a major Dubai trade partner, could impact a recovering UAE economy.
A dispute with Iran over three Gulf islands located near shipping lanes has rumbled on for three decades, with little sign of it turning to armed conflict, but both sides remain sensitive on the issue. Tehran issued a sharp riposte in April after the UAE foreign minister drew parallels between Iran’s control of the islands and Israel’s occupation of Arab land.
The islands, Abu Musa and the Greater and Lesser Tunbs, are controlled by Iran but claimed by the UAE with broad Arab backing. Ties with Iran have been strained since Iran installed maritime offices on one of the islands in 2008.
What to watch:
- Any signs that either side might further escalate the dispute, either with unilateral acts or through damaging trade, which could dampen an economic recovery.
* For political risks to watch in other countries, click on [ID:EMEARISK] (Writing by Cynthia Johnston, Reed Stevenson and Erika Solomon; Editing by Myra MacDonald)