DUBAI (Reuters) - The United Arab Emirates began to bail out and consolidate Dubai’s rattled banking sector and curb a building frenzy on Monday as the former boomtown started cutting state spending in the face of the global crisis.
In major policy shifts, the federal government will inject capital into Emirates Development Bank, a rescue vehicle created to absorb merging lenders Amlak AMLK.DU and Tamweel TAML.DU, while in Kuwait the country’s sovereign wealth fund prepared to repatriate $3.66 billion of foreign investments.
Mohamed Alabbar, a member of the emirate’s ruling council, assured investors the Gulf’s regional financial hub of Dubai was able to meet its sovereign obligations as pressure from the global financial crisis mounted.
“We will see more consolidation, especially with third-party developers, who may be facing some lending difficulties,” Alabbar told a conference in comments marking the first official recognition that Dubai will have to scale back its lofty ambitions.
“We are rationalizing our expenditure and consolidating our activities,” he said.
Markets took the message to heart as Dubai’s leading index .DFMGI plunged to its lowest level since November 2004, real estate developer Emaar Properties (EMAR.DU) leading the way with a 9.5 percent fall.
A state-funded bailout would be a major policy shift for the 37-year-old confederation of seven seaside emirates where the federal government has played the role of a facilitator rather than an underwriter of progress.
A cash injection would also represent the first big step by the federal government, dominated by the conservative oil-exporting emirate of Abu Dhabi, to bail out high-flying banks in neighboring Dubai.
The UAE rescue comes on the heels of European and U.S. bank bailouts, the most dramatic of which emerged earlier on Monday when U.S. authorities agreed a support package for Citigroup Inc (C.N).
Gulf woes have been compounded by the fall in oil prices, which have hovered near $50 a barrel in recent days, the level at which many Gulf exporters have budgeted their growth plans.
The UAE has resorted to drastic measures to stem the financial crisis in recent days. It placed the planned merger of Amlak and Tamweel under a little-known state-run entity called Real Estate Bank, then placing Real Estate Bank into the newly created Emirates Development Bank (EDB), which will receive federal funding and be majority-held by the federal government.
“The details are being worked out but the new entity will be supported by capital and funding,” Alabbar said.
Ratings agency Moodys cautioned that matters for UAE banks will worsen as cheap liquidity has all but dried up, which will pressure lending and profits.
In what marks the end of an era for Dubai, Alabbar said the emirate would now pare its construction ambitions back in anticipation of waning demand after spending the past five years building as much property as fast as possible.
The UAE has about $1 trillion worth of construction and infrastructure projects planned or in progress, according to the Middle East Economic Digest.
“If you have to pull something then you pull something,” said Alabbar, who is also on an emergency committee set up to steer Dubai through the financial crisis.
It also marks a fall from grace for Dubai, which seduced investors from Europe, North America and Asia with the promise of tax-free income, year-round sunshine, luxury accommodation and high-end shopping.
From this point on, the emirate would rely on federal support, in part, to extract itself from the mire.
“It’s a collective effort,” Nasser al-Shaikh, director general of Dubai’s Department of Finance said when asked about intervention. “In some cases you will see the (federal) government helping companies directly.”
Alabbar played down speculation that Abu Dhabi had bid for some of Dubai’s choice assets such as Emirates Airlines or Nakheel Properties.
Wealthy Abu Dhabi, one of the world’s biggest oil exporters, has long been expected to bail out Dubai, which has virtually no mineral resources but has made an audacious bid to become a regional trade and tourism hub.
The global financial crisis is now tearing through the Arab Peninsula — until recently thought immune due to massive sovereign savings and earnings from energy exports — with almost the same violence as in Europe and North America.
Despite the headwinds, Dubai will meet all its official obligations and will help state-affiliated companies if needed, said Alabbar.
Dubai’s sovereign debt stands at $10 billion while the debts of state-affiliated firms amount to $70 billion, he said, broadly in line with external estimates.
Dubai held $90 billion in government assets and $260 billion in assets belonging to state-affiliated companies, he said.
“The government can and will meet all obligations going forward,” said Alabbar, who is also chairman of Emaar Properties.
Separately, in a sign of how even the wealthiest of the wealthy Arab states have suffered, the Kuwait Investment Authority (KIA), which manages the Gulf Arab state’s assets, has withdrawn about 1 billion dinars ($3.66 billion) from abroad to invest at home, a newspaper said on Monday.
Sovereign funds from Gulf Arab countries, once among the biggest investors in Western capital markets, have redirected their firepower to home in recent months to bolster liquidity and appease domestic concerns about falling stock prices.
Writing by Thomas Atkins; Editing by John Stonestreet and Jon Loades-Carter