A Harsh New Dawn for Dubai

Published December 2nd, 2009 - 09:09 GMT

- On November 25th, the government of Dubai announced that it had raised an additional US$5 billion as part of the second tranche of the US$20 billion bond programme that was launched in February 2009

 

- The US$5 billion bond was equally subscribed to by the National Bank of Abu Dhabi (NBAD) and Al Hilal Bank, both majority owned by the government of Abu Dhabi. The first amount scheduled to be drawn down is US$1 billion and will be split equally between a conventional bond issuance to NBAD and a Sukuk to Al Hilal Bank, indicated the statement issued by the government of Dubai on November 25th

 

-In addition, the government of Dubai also announced that it had authorised the Dubai Financial Support Fund (DFSF) to spearhead the restructuring of Dubai World, effective immediately, and asked all holders of the Dubai World and Nakheel debt to accept and agree to a “standstill” in debt repayments until, at least, May 30th, 2010, technically giving it a breathing space to restructure the operations and debt. A Chief Restructuring Officer (CRO), from Deloitte LLP, has been appointed and will be working with the Dubai World executive management team to oversee the restructuring process and ensure the continuity of Dubai World’s operations

 

-The news late last week, while a welcome admission of weakness, was unsettling on a number of levels, not the least being that it created uncertainty in the UAE, the region and, as we have see, global markets. While the market awaits details of what Dubai may do, from selling assets to restructuring its assets and debt, we review the potential impact on Dubai, the UAE and the wider region

 

-An unfortunate consequence of Dubai’s action in asking to delay its debt obligations is that the perceived risk profile of the MENA region has risen. This has been seen in the widespread share price markdowns on the first day of trading, since the news was announced on the eve of the Eid Al Adha Muslim holiday. However, we remain positive about prospects for Qatar and Egypt particularly, and to a lesser extent, Saudi Arabia, given the current high valuations. There is little direct regional contagion in the real economies from Dubai’s action and we review related stocks within the report and note that outside the UAE, very few regional stocks are affected negatively, and where they are, that effect is limited and not of particular concern

 

- Clearly, there will be continued negative sentiment about Dubai for the foreseeable future, but Abu Dhabi should not be viewed in the same light. While almost all the UAE banks will be hit, the Central Bank of the UAE has stepped in to support the financial infrastructure, to ensure domestic and international confidence in its banks. However, from our perspective, the UAE banks are going to be constrained for some time. We also anticipate that much of Abu Dhabi’s major projects will proceed, unaffected by what happens in Dubai. Regionally, while we await news from banks in Saudi Arabia and Qatar (the markets remain closed for the Eid Al Adha holiday), the Egyptian banking sector looks unscathed. Within the regional construction and building materials sectors, only OCI looks exposed, but this exposure is marginal, and if there is any share price weakness, we recommend using this as an opportunity to buy a company which we continue to rate highly

 

- Looking further out, most of the MENA region’s economies have been developing the many services which have brought Dubai into such prominence, from the tourism infrastructure to retail services and improving and adding to the stock of housing and up-to-date commercial space, as witnessed in North Africa, in Morocco and Egypt, and from Syria to Qatar and Saudi Arabia. The economies of the region continue to see ongoing economic reform and the removal of barriers to trade and in doing business. Against this background, therefore, Dubai is facing ever-increasing competition for capital, business and tourism and it is going to be increasingly difficult for Dubai to recover quickly given this regional competition. We remain bearish about prospects in Dubai, but, as we note above, we also remain positive for the Egyptian and Qatari stocks, and, to an extent, Saudi Arabia given its relatively higher valuations


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