Dubai May Forfeit Status as Financial Hub to Get Abu Dhabi Help

By Henry Meyer

Nov. 30 (Bloomberg) -- Dubai, the debt-laden Gulf city- state, may lose its status as the region’s financial hub in return for a rescue package from its oil-rich neighbor Abu Dhabi, economists and analysts said.

The bailout will mean eliminating financially unviable parts of the competing, state-run companies which lie at the root of the city’s at least $80 billion debt, according to Dubai-based UBS AG analyst Saud Masud. Dubai may also have to revert to specializing in trade and services, and drop its drive to become a regional banking center, said Ian Hay Davison, former chairman of the Dubai Financial Services Authority.

“Abu Dhabi has financial ambitions of its own,” said Eckart Woertz, an economist at the Gulf Research Center in Dubai. “Dubai will have to focus on its core competencies. There is terrible damage to its ambitions in the financial field from how it handled this.”

The immediate future of Dubai, whose ruler Sheikh Mohammed Bin Rashid Al Maktoum guarded the emirate’s independence, rests on how creditors respond to the demands to delay payments on $59 billion in debt and liabilities of flagship holding company Dubai World. The news sparked a sell-off in world stock markets due to concern that emerging-market risks may set back recovery from the worst global decline since the 1930s.

Moody’s Investors Service says Dubai’s debt may be as high as $100 billion, of which up to $25 billion is bad debt. Dubai World property unit Nakheel PJSC has $3.52 billion of Islamic bonds due Dec. 14.

Central Bank Money

The United Arab Emirates’ Abu Dhabi-based central bank said yesterday it “stands behind” the local and foreign banks. Abu Dhabi has yet to say whether it will step in to avoid default on the Nakheel bond. The sheikhdom has one of the largest sovereign wealth funds in the world, worth $627 billion according to the Roseville, California-based Sovereign Wealth Fund Institute.

The emirate, in control of 8 percent of the world’s oil reserves, is plowing the cash into its own diversification effort, buying shares of international banks, carmakers and chemical companies. Aabar Investments PJSC, which is 70 percent owned by Abu Dhabi, is in talks to raise its stake in Daimler AG to 15 percent from 9.1 percent, Khadem Abdulla Al-Qubaisi, the fund’s chairman, said on Nov. 16.

Abu Dhabi ruler Sheikh Khalifa Bin Zayed Al Nahyan’s priority will be to limit the fallout from Dubai while containing the free-spending neighboring emirate, said Tristan Cooper, a Dubai-based Middle East sovereign analyst at Moody’s.

Intervention

Dubai’s diversification away from dwindling oil reserves may yet help it bounce back from the current slump.

“I’m confident we’ll see some kind of Abu Dhabi intervention so this is more of a short-term thing,” said Haissam Arabi, chief executive officer of the Gulfmena Alternative Investments hedge fund in Dubai.

Dubai opened a stock exchange in 2000 and the Dubai International Financial Centre in 2004 to attract global financial institutions such as Goldman Sachs Group Inc. and HSBC Holdings Plc. Financial services accounted for 8.3 percent of Dubai’s economy in 2008.

Still, the city state, which sparked a property boom by allowing foreigners to invest in 2002, has suffered the steepest real-estate decline in the world since the credit crisis hit last year. It built islands in the shape of palms, the world’s tallest tower and a ski slope inside a shopping mall.

Property Slump

Home prices fell 50 percent from their peak in the third quarter of 2008, Deutsche Bank AG said on Nov. 5. Prices may drop as much as 30 percent more, UBS AG said Nov. 18.

Just days before the Dubai World announcement, Sheikh Mohammed demoted three business aides who were pivotal in the emirate’s debt-fueled expansion. He also removed the governor of the DIFC, Omar Bin Sulaiman, who had led efforts to transform Dubai into a finance hub.

This “very public concession” to Abu Dhabi will now be followed by the dominant U.A.E. emirate taking “a more active role in Dubai’s affairs,” Eurasia Group, a New York-based political risk consulting group, said in an e-mailed commentary.

Dubai sold $10 billion in bonds to the national central bank based in Abu Dhabi in February. Two Abu Dhabi banks provided a further $5 billion injection on Nov. 25. More money will be required, said Eurasia.

Abu Dhabi may seek to take over some of the financial activities of Dubai, according to Woertz.

Abu Dhabi is building a new financial center just off the city’s coast on Sowwah Island, which is scheduled to be completed as early as 2014 and will house the headquarters of the Abu Dhabi Securities Exchange. Al-Hilal Bank and National Bank of Abu Dhabi, which together provided the $5 billion for Dubai on Nov. 25, have bought plots on Sowwah Island, Abu Dhabi investment company Mubadala announced Oct. 1.

Dubai will focus on its strongest businesses including Jebel Ali Free Zone and DP World, which owns the Middle East’s largest port and has activities in 31 countries, says Woertz. Both are owned by Dubai World, Nakheel’s parent company.

“As a service center to the region it has a role,” Davison said of Dubai. “As a counterpart to New York it’s seriously set back.”

To contact the reporter on this story: Henry Meyer in Dubai at hmeyer4@bloomberg.net;