U.A.E. Central Bank Steps In to Support Dubai Debt

By Camilla Hall and Haris Anwar

Feb. 23 (Bloomberg) -- The United Arab Emirates’ central bank stepped in to support Dubai after concern increased the emirate will struggle to repay its debt as global financial turmoil pushed up credit costs and burst a real-estate bubble.

The central bank bought half of an unsecured, $20 billion, 5-year notes issue at an annual interest rate of 4 percent, Dubai’s Department of Finance said in an e-mailed statement yesterday.

Home to the world’s tallest building, most expensive hotel suite and largest manmade islands, Dubai borrowed $80 billion to turn itself into a regional financial and tourism hub. Moody’s Investors Service said in October that Dubai may need help from Abu Dhabi to pay for its debt. The emirate may have to refinance $15 billion this year in maturing loans and bonds, Moody’s said.

“This is the biggest news of the year for the regional bond market,” said Abdul Kadir Hussain, chief executive officer of Mashreq Capital, a unit of the United Arab Emirates’ fifth- biggest lender by assets. “This is a clean solution to Dubai’s short-term refinancing needs. We’re already seeing Dubai-based bonds rallying on this news.”

The cost to protect Dubai debt against default fell to 800 basis points, from around 900 on Feb. 19, according to data provided by Mashreqbank PSC. The Dubai Financial Market General Index gained 4.3 percent to 1,597.42 at 11:36 a.m. in Dubai, rising to the highest since Feb. 19. The index has tumbled 73 percent in the past 12 months.

Real-Estate Slump

Real-estate prices have fallen 25 percent in Dubai from September’s peak and 20 percent in Abu Dhabi, Morgan Stanley said in a Feb. 2 report. The decline comes as a more than 70 percent slump in oil prices since July and scarce global credit pushed investors to dump assets in the emirate.

Financial institutions worldwide have amassed $1.1 trillion of credit losses and writedowns and raised $991 billion of capital since the U.S. subprime mortgage market collapsed, data compiled by Bloomberg show. The U.S., Britain, France and Germany are among nations that have injected billions into banks to prevent a wider financial calamity.

“This mess globally is so big only governments can tackle it, in my opinion, because they have to restore confidence,” said Sultan Ahmed bin Sulayem, chairman of state-owned Dubai World, in a Feb. 17 interview.

Dubai World owns DP World Ltd., the third-largest international port operator, Istithmar World, a private equity firm that acquired Barney’s New York Inc. in 2007, and Nakheel PJSC, builder of palm-shaped islands in the Persian Gulf.

Abu Dhabi Helps Banks

Abu Dhabi, the biggest of the U.A.E.’s seven emirates and holder of the world’s largest sovereign wealth fund, said earlier this month it will inject $4.4 billion into five of its own banks, sparking concern Dubai won’t get the same treatment.

The U.A.E. in September set up a $13.6 billion fund for the countries’ banks to boost liquidity. In October, it guaranteed bank deposits and said it would add another $19 billion into the banking system. Abu Dhabi’s wealth fund had $328 billion in assets at the end of 2008, according to a study by economists at the Council on Foreign Relations.

“The program should cover the obligations and provide some extra for the continuation of the expansionary budget spending plan,” Monica Malik, an economist at EFG-Hermes SAE, the largest Arab investment bank by market value, said.

Dubai said it will run a budget deficit of 4.2 billion dirhams this year as it boosts government spending by 42 percent to stoke economic growth.

To contact the reporter on this story: Haris Anwar in Dubai on Hanwar2@bloomberg.netCamilla Hall in Dubai at chall24@bloomberg.net