Wednesday, November 26, 2008

Putting the United in UAE

Will the financial crisis bring the UAE closer together, or reveal existing divides between the separate emirates? Or both?

In the space of a decade, Dubai propelled itself from a desert backwater into the global limelight, attracting millions of sun-seeking expatriates and tourists with ambitious projects and tax-free shopping and living.

Meanwhile few people outside the Middle East had heard of Abu Dhabi, the capital of the United Arab Emirates federation and home to most of its crude oil reserves.

But the federal government's move to rescue two Dubai-based Islamic mortgage lenders this week comes as the starkest sign yet that the heady boom years are over for the free-wheeling emirate widely dubbed as Dubai Inc -- at least for now.

"There may be some schadenfreude on the Abu Dhabi side on one hand but on the other hand they don't want to see Dubai fail," said Eckart Woertz, economist at Gulf Research Center.

"That it is the federal government not the Dubai government that is doing this tells you something about the economic capabilities of the two emirates ... There will be a redistribution so the overall importance of Abu Dhabi in the federation will increase even more."
Dubai executive council member Mohamed Alabbar strenuously denied on Monday that the emirate was in any talks to receive financial aid from the federal government and said it had received no offers for major Dubai government-owned assets such as Nakheel properties and Emirates airlines.

Yet unlike other Gulf Arab oil-exporters that built their infrastructure development projects on petrodollars from six years of soaring crude oil prices, Dubai is leveraged.

Alabbar said the government now owed $10 billion and state-affiliated firms $70 billion, which it could pay, but a tightening of mortgage lending, freezing of liquidity and real estate slowdown has made life harder for Dubai.

"There is a fine line whether we are discussing federal or local ... it's almost the same. It is difficult to separate," Alabbar told reporters in Dubai. "All this behavior indicates this is just one country."

And it is not just Dubai that could begin to move further into the federal fold. Analysts say that if Dubai is suffering, smaller UAE emirates -- Ras al-Khaimah, Ajman, Umm al-Quwain, Sharjah and Fujairah -- may also benefit from a collective effort to weather the crisis.

There's something to be said for healthy competition between Abu Dhabi and Dubai. A stronger federal role -- the UAE becoming less of a confederation -- is not unambiguously good for the country.


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