Key Points

 

  • Dubai government has announced that it will ask creditors for a six-month “standstill” for its debt;
  • The inability of Dubai-government owned Nakheel to repay its maturing bonds on 14 December 2009 is a massive blow for the credibility of Dubai;
  • Dubai’s future development plans will likely be halted in the short to medium term;
  • Dubai will have to rely on assistance from Abu Dhabi to repay its massive debt. Such support will unlikely come without a large political price.

 

Dubai World, owner of master-developer Nakheel, and owned by the Dubai government will ask creditors for a “standstill” and an extension of maturities for all debt financing by 6 month, to “at least 30 May 2010” according to an official statement.

 

Nakheel, the developer of the iconic man-made palm islands has a US $3.52 billion Islamic bond (sukuk) maturing on 14 December 2009. Dubai World-owned developer Limitless, has a further US $1.2 billion Islamic bond maturing on 31 March 2009. Dubai World has at least US $59 billion of liabilities, forming about 60% of Dubai’s total debt.

 

The cost of insuring Dubai government debt against default using 5-year credit default swaps soared, jumping over 100 basis points to 420.6 from a close of 318 one day earlier. Nakheel's sukuk prices fell more than 20 points to 87.

 

The Department of Finance said US $5 billion Dubai were raised today by selling bonds to two Abu Dhabi government-controlled banks for its support fund. The statement said that the bonds and the restructuring plan were unconnected.

 

 

Analysis

 

 

 

Figure 1: Dubai’s maturing debt in the next 4 years

 

The ability of Dubai to repay the Nakheel sukuk debt by the maturity date has been seen as test of the emirate’s financial standing. The news that Dubai will not be able to repay the Nakheel debt by the maturity date is the worst possible financial news that has come out of Dubai.

 

There are three main conclusions that can be made:

  1. Support from Abu Dhabi has not been forthcoming and despite repeated appeals by Dubai, Abu Dhabi seems to be content to see Dubai in more serious difficulty to maximize potential benefit from such support;
  2. Transparency from Dubai government about its financial health has been misleading, as very few doubted Dubai’s inability to pay off the Nakheel's sukuks by the maturity date;
  3. The financial health of Dubai is in much worse state than many have predicted;

 

Dubai broke the news on the eve of a major regional holiday. This is meant to help the news be absorbed more easily by local markets. However, the seriousness of it is unlikely to be diluted by the timing of its release.

 

The results of the news will lead to:

  1. A shattering in the confidence of the health of the Dubai economy, not only with regards to the emirate’s ability to pay off its current debt, but also for future plans to resume its ambitious development plans;
  2. An impact on the Abu Dhabi-Dubai relations.

 

Conclusion

 

The announcement is a turning point in the development process of Dubai. It is an acknowledgement by the Dubai government of its failure to secure help to address is massive debt. Now that this point has been reached, it is very unlikely Dubai will fully recover before substantial sources of financial help are found. With this expected default, sources of such help are more limited and so is most likely to come from Abu Dhabi, but as it has reached this critical stage for Dubai, it will come at a much larger political price. This implies that the development of Dubai in the short to medium term will very much be influenced by help from Abu Dhabi, unless other sources of income – possibly from other Gulf states, are found.