By Matthew Brown
October 13, 2008 (Update2)
SourceOct. 13 (Bloomberg) -- Dubai may need help from Abu Dhabi and the United Arab Emirates government to finance a surge in borrowing that paid for the world's tallest tower, palm tree- shaped man-made islands and stakes in banks worldwide.
Dubai's ``potential reliance'' will be ``most significant'' in coming years, Moody's Investors Service said in a report today. Government-controlled companies owe at least $47 billion, more than Dubai's gross domestic product, and they will continue to accumulate debt at a faster pace than the economy grows, the New York-based rating firm said.
``These companies that are based in Dubai have become larger than Dubai itself,'' said Giyas Gokkent, chief economist at National Bank of Abu Dhabi, the U.A.E.'s second-largest commercial bank by assets. ``If anything were to go wrong with any of these companies, Dubai does not have the wherewithal to deal with it.''
State-owned Dubai World paid about $5.1 billion for almost 10 percent of Kirk Kerkorian's MGM Mirage last year; the price has tumbled since to $16.80 from $84. DP World, the government- run company that bought Peninsula and Oriental Steam Navigation Co. for $6.8 billion in 2006, has slumped 55 percent this year on the Dubai International Financial Exchange.
Ruler Sheikh Mohammed bin Rashid al-Maktoum has borrowed to replace Dubai's dwindling revenue from oil, investing to boost earnings from tourism and finance. State-owned carrier Emirates has increased its fleet to the largest in the Middle East, in a bid to double tourists per year to 15 million by 2015. Dubai Holding LLC, which groups assets belonging to Sheikh Mohammed, owns hotel chain Jumeirah Group.
Abu Dhabi Oil
Abu Dhabi, by contrast, owns more than 90 percent of the U.A.E.'s oil reserves, almost 8 percent of the world's total. The Abu Dhabi Investment Authority, its sovereign wealth fund, is the world's largest with assets of between $250 billion and $875 billion, according to the International Monetary Fund.
ADIA's Head of Media Relations Erik Portanger declined to comment on Moody's report.
Dubai's approach is backfiring as investors avoid the most indebted companies on concern the global credit crunch will increase defaults, while real-estate and company assets slump.
Deutsche Bank has fallen nearly 70 percent since Dubai government-owned DIFC Investments bought a 2.2 percent stake for about $1.8 billion in May 2007. Standard Chartered has declined 15 percent since state-owned Istithmar PJSC acquired a 2.7 percent stake for about $1 billion in October 2006.
The cost of insuring Dubai Holding's bonds has increased nearly four-fold since May, according to traders of credit default swaps. Credit-default swaps on Dubai Holding Commercial Operations traded at 679.3 basis points on Oct. 10, up from 172.99 at the beginning of May, CMA Datavision prices show.
The company's $500 million of 10-year notes due 2017 fell 2.2 percent today, raising the yield to a record 13.1 percent, Bloomberg data shows.
Dubai Model
While Dubai's economic model ``has proved successful to date, cumulative liabilities are currently rising faster than investments are able to generate returns,'' Moody's senior vice president in Dubai, Philipp Lotter, said in the report. This ``necessitates a clear understanding of wider implicit federal support when rating key government-backed corporation.''
Moody's expects a ``high level'' of support from Abu Dhabi for the ``most important'' publicly-owned companies in the U.A.E., Tristan Cooper, Moody's Middle East sovereign analyst, said in the report.
A spokesman for the Abu Dhabi government declined to comment on whether the emirate would assist its neighbor in meeting its debt obligations.
Abu Dhabi and Dubai are the two-largest emirates in the seven-member U.A.E. Dubai controls its economy through state- owned companies that dominate each major industry.
Mohammed Al Gergawi, chairman of Dubai Holding, and Sultan bin Sulayem, chairman of Dubai World, didn't answer their mobile phones when called for comment today.
`Unprecedented'
Abu Dhabi taking stakes in Dubai companies to help prop them up would be an ``unprecedented'' step ``that would have to be tested,'' Gokkent at the state-controlled National Bank of Abu Dhabi said in an interview. ``The Moody's debt numbers are conservative'' for Dubai, he said.
Dubai's benchmark stock index is down 44 percent as concerns over real-estate valuations and banks' access to capital weighed on investors.
``In most countries there are identifiable delineations between the public and private sectors,'' Cooper said in the report. ``In Dubai, however, the state corporatist model plus the fact that the ruler and his closest relatives form the core of the government make it difficult to draw such distinctions.''
To contact the reporter on this story: Matthew Brown in Dubai at
mbrown42@bloomberg.netLast Updated: October 13, 2008 10:21 EDT