Economic analysis of events in the United Arab Emirates and the Gulf
Monday, December 21, 2009
The code of trust
Trusting in Allah but treating man with greater caution was followed by the pearl fishers, both in their dealings with each other and with their captain. Whilst the oysters were being opened, four 'guards' or 'watchers', haras, from among the crew would sit inspecting the work to make sure no one who found a large pearl could hide it away to keep it for himself. ... There was no wage economy. This was their profit he would be stealing. ... The crew also had witnesses present when their captain was selling the pearls.... Nevertheless, they were aware ... that some captains secretly accepted presents from merchants.
CORRECTED-(OFFICIAL)-UPDATE 1-Dubai seeks govt dept surpluses Thu Dec 17, 2009 11:55am EST
(Corrects after Dubai government clarifies earlier statement which it says was meant to refer to government departments only, not to state-related entities)
This is what happens when you rush to, um, build investor confidence.
More from Reuters:
Dubai's ruler on Thursday issued a law ordering government departments to transfer their surplus revenues to the emirate's treasury, and to improve transparency and control of public spending. ... The new law allows profits and revenue surpluses to be reinvested, with the approval of the Supreme Fiscal Committee, in consultation with Investment Corporation of Dubai, which oversees the emirate's investment portfolio. ... The new law announced on Thursday also aims to regulate government departments' public spending "and control government revenues (and) provide an accurate database for revenues and expenditures." Top Dubai officials -- the heads of the Supreme Fiscal Committee and ICD -- were due in New York on Thursday in an effort to rebuild confidence in the Gulf emirate's finances after a stop in London the day before.
In other words, the budgets of the government and the government-owned businesses are being unified?
Dubai World is a decree corporation, meaning it was established through a decree of the Ruler of Dubai, and consequently has a unique legal status. Among other matters, the obligations of Dubai World are not guaranteed by the Government.
Due to its status as a decree corporation, Dubai World does not have the ability to seek protection under the provisions of the UAE Commercial Code that govern bankruptcy and insolvency (see Part 5 (Bankruptcy and Composition) of Law No. 18 of 1993 (UAE Commercial Transactions Law).
Because of the absence of a reorganization law applicable to Dubai World, the Government of Dubai developed the Decree, which provides a legal framework for the restructuring of the obligations of Dubai World and its subsidiaries. The Government’s intention was to develop a law that would permit a restructuring of the obligations of Dubai World and its subsidiaries in accordance with international best practices following a fair, equitable and transparent legal process.
From a Gulf News story about Decree No. 57 of 2009, effective as of 13 December 2009, the date on which it was signed by the Ruler of Dubai.
models two drivers, both headed for a single lane bridge from opposite directions. The first to swerve away yields the bridge to the other. If neither player swerves, the result is a costly deadlock in the middle of the bridge, or a potentially fatal head-on collision. It is presumed that the best thing for each driver is to stay straight while the other swerves (since the other is the "chicken" while a crash is avoided). Additionally, a crash is presumed to be the worst outcome for both players. This yields a situation where each player, in attempting to secure his best outcome, risks the worst.
The stakes of the actual game in this case of course include bystanders like the bond holders, and any adverse macroeconomic effects that might arise from a collision. As Bertrand Russell put it,
As they approach each other, mutual destruction becomes more and more imminent. If one of them swerves from the white line before the other, the other, as he passes, shouts 'Chicken!', and the one who has swerved becomes an object of contempt. As played by irresponsible boys, this game is considered decadent and immoral, though only the lives of the players are risked. But when the game is played by eminent statesmen, who risk not only their own lives but those of many hundreds of millions of human beings, it is thought on both sides that the statesmen on one side are displaying a high degree of wisdom and courage, and only the statesmen on the other side are reprehensible.
If you're like me, you'd say it was of Dubai's making (along with its not so innocent bondholders who believe Abu Dhabi would bail them out in case of default). But others take the view that given potentially adverse effects of delay, Abu Dhabi have should immediately said it would bail out the bond holders. And still others, like me again, think Dubai should have offered some of its crown jewels (Emirates Airlines, for example) as a collateral for an emergency loan from Abu Dhabi. But none of that happened, at least until the 14th of December: Abu Dhabi and Dubai were locked in a game of chicken.
So the game of chicken was played. Given that there was not a collision, there are two essentially possibilities: (1) Abu Dhabi played chicken and made a no-strings loan to Dubai, or (2) Dubai played chicken and offered collateral for the loan.
No video embed available, but click here to see how James Dean played the game of chicken in the movie Rebel without a Cause. Here's the trailer to the movie:
The average Yemeni spends one quarter to one third of his income on qat. Three quarters of the population devote four to six hours daily to buying and chewing the leaves, consumed in the later afternoon after the day’s main meal. Although qat has no nutritional value, a third of Yemen’s agricultural land — double the acreage of a decade ago — is devoted to it.
In a sign of the struggles Dubai World could face to keep its prized assets, Istithmar World lost its W Hotel in New York in a foreclosure auction Tuesday. The hotel was sold for $2 million. Istithmar World bought the property for $282 million in 2006.
Mr Nassour’s home should have been completed at the end of this year but construction has not even started, nor is it likely to any time soon. He paid more than Dh350,000 in 2006 towards two properties at the long-delayed project, and now he is worried he may never see any return on his investment.
“They just cancelled my contract and I won’t get my money back,” he says. Mr Nassour has turned to the Land Department for clarification and to find out what his rights are, but the experience has left a bitter aftertaste.
“That’s enough,” he says. “They need to make the issues they have clear to the investors. I can’t invest without having a clear view of what’s happening.”
But he did invest without a clear view. He's not alone as the article on small investors threatening court action makes clear.
The New York Times has a graph on other countries which may be facing debt problems; the same graph shows the exposure of bond holders by country. Thanks to The Gulf Blog for the pointer. Not of course that the U.A.E. has a debt problem. It's Dubai that has the problem.
Since Dubai announced it had a problem other countries have received more scrutiny.
Greece's finance minister promised Wednesday that the country wouldn't default on its loans as the cost of insuring its bonds soared to the highest among the 16 nations that use the euro. ... He said speculation that Greece would not be able to pay back its borrowing was "completely unfounded" and there was "absolutely no risk to holders of government bonds."
Spreads on Greece's bonds -- the cost of insuring them against the risk of not being repaid -- overtook Ireland as the widest in the euro zone a month ago, even before markets were rocked by an announcement by Dubai's state investment company that it wanted to postpone debt payments. ... "The battle with the markets is one that you win every day with a view to the credibility of your policy and this is what we are trying to build — credibility," he said.
The ratings agency Standard & Poor's has cut the credit rating of six Dubai companies linked to the government to junk status. S&P said extraordinary support from the Dubai government seemed "low" after the emirate said it would not guarantee Dubai World's debts. ... S&P said it was not rating Dubai World or its property arm Nakheel. It said that under its criteria, a credit standstill - which is what Dubai World had asked for - "is considered a default". ... In addition, the rating on four banks was cut to junk. They were Emirates Bank International, National Bank of Dubai, Mashreqbank and Dubai Islamic Bank.
All that Arab culture learned in a thousand years about adapting cities to great heat -- high-ceilinged buildings along narrow streets which provide shade and short distances to walk outside — have been forgotten or ignored. Confoundingly, with all of Europe and Asia to learn from, the city's design ignores the goals of the sophisticated tourist — to be able to walk around outside — in favor of antiquated down-market Las Vegas.
City Comforts describes itself as a blog "with a new focus on civilizing the real estate megaprojects of the Middle East, East Asia and even the USA."
Five of the 10 tallest buildings in New York City today were planned at the tail end of the ebullient 1920s and completed in the early 1930s. In their day, they were the tallest structures in the world, but it took more than a decade for the Empire State to stop being the “Empty State Building.”
That's Edward Glaeser, of Harvard, known for a wide body of economic research including "his work examining the historical evolution of economic hubs like Boston and New York City."
He says Dubai "has condensed three different stages of growth into less than 50 years."
It's in the third stage, and stumbling:
Dubai’s long-run success depends on attracting skilled workers who will not stay in a city that offers only sun-baked purgatory. For a decade, the sheik has tried to promote a third type of growth for Dubai, by turning the city into a place of pleasure with soaring skyscrapers, vast malls and spectacular luxury hotels.
Just as Las Vegas has long succeeded by allowing more misbehavior than Nevada’s neighbors, Dubai recognizes the opportunity that comes from the strictness of neighboring Islamic states....
While Dubai’s good infrastructure, pro-business government and consumer amenities may enable the city to eventually succeed as a connector between the West, the Middle East and India, Dubai has now massively overbuilt relative to the level of current demand. Dubai now has the tallest building in the world, and 11 skyscrapers that are taller than any European building.
Fifty-story buildings are an efficient way to deliver plenty of space, but extreme height is far more expensive and a bellwether of irrational exuberance.
So if the Empire State Building was called the Empty State Building, what nickname do you think is appropriate for the Burj Dubai? (Follow last link, move mouse over image of the tower and click to see comparison to Empire State Building and skyscrapers.)
Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.
That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call.
Why does Abu Dhabi have to do the same? The U.S. bailed out Citigroup and other banks because of the harm it would do to the U.S. economy if it hadn't. It's by no means clear that there is a parallel in the U.A.E. case. It may be a small price to pay to make sure Dubai bears not the upside, but also the downside of its investment decisions. Also, the potential for real harm may be primarily external to the country. Even there Dubai's default does not appear to be systemically important.
So if Citigroup needs a bailout, it could be the U.S. taxpayer footing the bill. Again. That's what Sorkin seems to be saying. And Tyler Cowen underscores.
Indecision is costly. The worst kind of indecision is decisiveness so unburdened by facts that today's decision is just as decisively reversed tomorrow. I call it the nevermind syndrome. It is prominent in the Gulf, and it may be Dubai's undoing.
Of course I'm sure. How dare you question my authority?
