FACTBOX-Key political risks to watch in the United Arab Emirates

DUBAI Wed Dec 1, 2010 3:28pm GMT

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DUBAI Dec 1 (Reuters) - The cloud that still hangs over Dubai's financial future after the Dubai World debt crisis a year ago is the main 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.

DUBAI DEBT AND FINANCIAL WOES

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 and worries over how its government will raise badly-needed funds.

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 after 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 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.

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 managed to restructure some $24.9 billion of liabilities with creditors and 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. [ID:nLDE67O15E]

But investors are still worried about debt troubles at Dubai Inc, as the network of state-linked firms are known, even as top officials have sought to reassure them that Dubai is back on sound financial footing. [ID:nLDE6AR02M]

Both Dubai Holding, a conglomerate owned by Dubai's ruler that has debt obligations estimated at $14.8 billion, and its private equity unit Dubai International Capital, have asked for repayment delays on large loans.

The government has injected around $2 billion dollars into Dubai Holding, and said it was ready to inject more if needed.

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 to stand on its own and wants to contain further spillover from Dubai's debt into its economy and that of the federation.

BUSINESS SENTIMENT

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.

What to watch:

- The possibility of debt problems emerging in other state-linked units, which could deter investment.

REGIONAL ISLAMIST MILITANCY

The United Arab Emirates, the world's third largest oil exporter, has been spared al Qaeda attacks. But as a 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. They claimed responsibility for a failed plot in October to send two parcel bombs to the U.S., which were intercepted in Britain and Dubai.

The group, al Qaeda in the Arabian Peninsula (AQAP) has threatened attacks on Westerners in the region and seeks the fall of the Saudi royal family.

The UAE has 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, 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.

IRAN ESCALATION, SANCTIONS

The Gulf Arab region, of major strategic value, is concerned about being drawn into any armed conflict if a nuclear row between Iran and Western powers escalates.

A U.S. diplomatic cable leaked last month said UAE leaders saw Iran as "its primary external threat, and one that is existential in nature".

The same cable portrayed Abu Dhabi's crown prince, currently one of the most powerful figures in the UAE, as holding the view that "the logic of war" now dominates in the Gulf Arab region when it comes to dealing with the Iranian threat.

This explained his "near obsessive efforts to build up the UAE's armed forces", the cable said.

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.

Dubai's close economic ties with Iran have also attracted scrutiny from Washington, which has adopted tough sanctions on Tehran for refusing to halt its atomic activities.

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.

* For political risks to watch in other countries, click on [ID:EMEARISK] (Compiled by Cynthia Johnston, Reed Stevenson, Erika Solomon and Raissa Kasolowsky; Editing by Jon Hemming)

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