DUBAI Dec 1 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
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
- 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.
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
(Compiled by Cynthia Johnston, Reed Stevenson, Erika Solomon
and Raissa Kasolowsky; Editing by Jon Hemming)