Wednesday, March 04, 2009

What will Abu Dhabi ask in return?

The Economist, under the headline "The Outstretched Palm":
Dubai is suffering from a slump in the trading, lending, holidaying and profiteering that buoyed this remarkable emirate for so long.

On February 22nd Dubai was hoisted out of its financial trouble by its oil-rich neighbour, Abu Dhabi. The central bank for the United Arab Emirates (UAE) bought $10 billion-worth of Dubai’s five-year bonds. The bail-out confirmed everyone’s assumption that Abu Dhabi would not let the second-biggest member of the UAE fail. But its benefactor waited long enough to plant a seed of doubt in people’s minds. In recent weeks, the spreads on credit-default swaps for securities issued by Dubai’s government and several of its biggest corporations have widened alarmingly, if a little hysterically.
But what will Abu Dhabi ask in return? On the face of it, not much. Tristan Cooper, of Moody’s, a rating agency, had expected Abu Dhabi to be “a bit more fussy” about how the funds were used. It might, say, have taken equity stakes in Dubai’s freewheeling corporations or sought some control over their managers.

But Mr [Christopher] Davidson thinks the unstated price of Abu Dhabi’s support will be stiff indeed. “It is the end of the second emirate’s economic autonomy, which it has fiercely protected,” he says. Why else did Abu Dhabi put Dubai through “months of pain and humiliation”, if it did not see some long-term gain from chastening its neighbour and strengthening the UAE federation, Mr Davidson asks. Dubai will now have to be more accommodating of its neighbour’s wishes, he says. It will, for example, have to forgo its independent foreign policy, which had seen it become Iran’s outlet to the world, even as Abu Dhabi kept a careful distance.
That's one side of it. The other is that Dubai had Iran to go to as a lender of last resort -- Abu Dhabi didn't want Dubai to cross that bridge.

That raises the question, what is Abu Dhabi getting in return? Once the financial crisis passes what is to prevent Dubai from reasserting its independence?

Interesting, too, that the article doesn't say anything about Dubai's domestic policy or economic model. The fact is that Abu Dhabi has been busy playing catch up to Dubai in terms of hotels, higher education, technology, museums.

Thanks to a faithful reader for the pointer to the Economist article.



Anonymous shehab said...

Hi John,

Really enjoy your blog.
I doubt very much that the Iran bailout option was all that real or that Dubai played that card when negotiating with Abu Dhabi.

5:34 PM  
Blogger DeanO said...

Although I agree with the above poster, Iranians are already one of the top three investors in real estate in Dubai, but I do not know of any significant investments made by the Government of Iran.

John, do you think the government of Dubai will privatize some of their partly and fully owned real estate companies for some liquidity?

From a consumer point of view, to have state-owned companies "competing" in the same sector (like du and etisalat) is a joke.

9:36 PM  
Blogger John B. Chilton said...

I appreciate the push back I'm getting on the notion that Dubai even had the Iranian finance card to play (or that Abu Dhabi was successfully bluffed). It's not as anyone (except Abu Dhabi, perhaps) has much liquidity in the current market so the odds that the Iranian government (or a Saudi "benefactor") was available is a bit of a stretch.

As to whether Dubai might privatize in this market, I really doubt it simply because the real estate market itself is the source of the liquidity problem. More likely is that they declare bankruptcy -- which is perhaps where my argument about control of Dubai assets shifting to Iranian and Saudi investors comes in. Those are the investors who would get the assets -- and that would be something Abu Dhabi would want to prevent.

The real estate companies do appear to me to have been competing with each other. That's been part of the successful Dubai model -- or it was until the current downtown.

du and Etisilat are another matter. They are a duopoly. More, they are highly limited by _regulation_ (by the TRA) in the ways in which they can compete. This protects them from themselves -- it doesn't protect consumers, that's for sure.

12:00 AM  
Anonymous Emmeline said...

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5:26 PM  

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