Should we be worried about Dubai?

Won't Abu Dhabi come to the rescue?

Check out RGE's analysis. Of course - as the author mentions - yesterday Abu Dhabi loaned Dubai Bourse $1B "to avoid defaulting on a $3.4 billion loan." [But see UPDATE below.] Oddly (or not) the version of the Reuters story run in Dubai's Gulf News does not mention Abu Dhabi's role. I did not find the story in the Abu Dhabi-funded The National.


UPDATE: Financial Times reports,

At the eleventh-hour, local banks stepped in to make up the $1bn shortfall.

Bankers and officials dismissed reports that the UAE federal government had deposited funds in local banks to underwrite the shortfall.
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The closure of the $2.5bn loan, scheduled to be announced on Thursday, is an indication that Dubai has prized open clogged credit markets and should go some way to assuaging investor concerns about Dubai’s risk of default.

Lacking bailout Dubai heads into Icelandic territory

Wall Street Journal (subscription req.):

Abu Dhabi's decision last week to pump $4.4 billion into its own banks while offering no support to lenders in Dubai or other emirates in the Gulf federation may simply be brinkmanship amongst the sheikhs. But the possibility Abu Dhabi will refuse to come to Dubai's aid -- once seen as almost unthinkable -- can no longer be ruled out.

That raises the prospect of a deeper debt crisis in Dubai. And even a fragmentation of the 37 year-old federation if Abu Dhabi refuses to pump billions of dollars into the economies of poorer emirates like Dubai to prevent either a corporate default or severe downturn. The cost of insuring Dubai debt has rocketed to around 10 percentage points for five-year debt -- higher even than Iceland.
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Abu Dhabi is driving a hard bargain. Its demands are thought to include the surrender of Dubai's autonomy and the loss of control over crown jewels such as Emirates Airline and Nakheel, builder of the emirate's Palm-shaped islands. That may be too much for Dubai's ruling Maktoum family to stomach -- partly because the rulers of the two sheikhdoms are cousins. But also, because Dubai contends it was a principle of the 1971 agreement to form the federation that Abu Dhabi would use its oil wealth to support the other emirates.

Financial Times:

The cost of insuring Dubai’s sovereign debt has become almost as expensive as insuring troubled Iceland, illustrating the depth of investor concern about a default by the emirate.

The spread on Dubai’s benchmark five-year credit default swaps last week broke the 1,000 basis points barrier, similar to the spread of Icelandic bonds.
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nvestors have been spooked by Abu Dhabi’s decision this month to inject funds into its own banks, without similar support for financial institutions in other emirates. Analysts had previously hoped that the capital of the United Arab Emirates would step in to prevent a default in Dubai, the UAE’s commercial hub.

“The market’s thought process is moving from Dubai being implicitly guaranteed by Abu Dhabi to questioning the relationship between Dubai and Abu Dhabi,” said Dino Kronfol, managing director at Algebra Capital in Dubai.

Birth of a nation, 41 years ago:

Roughly half way along the highway between Abu Dhabi and Dubai, there is an interchange at a place called Semeih. ... It was here, 41 years ago tomorrow, that the two fathers of the UAE federation, Sheikh Zayed of Abu Dhabi and Sheikh Rashid of Dubai, met on February 18 1968, to lay the foundations of the state of today.

The author, Peter Hellyer, makes no mention of his disagreements with Christopher Davidson about the meeting place.

As to a bailout, Secret Dubai thinks Dubai did get one from Abu Dhabi after craftily courting Iran and Saudi Arabia for aid. It's a strategy that I and others have suggested. Abu Dhabi doesn't want its fellow emirate to be beholden to either of those.

Abu Dhabiwood

Financial Times:

Abu Dhabi is seeking to usurp Dubai as the region’s leading media hub. The Islamic state remains wary of some western content, however, only agreeing to show edited versions of Syriana, the George Clooney film, because it feared that it would show the Gulf in a negative light.

Mr Borgerding, a former Walt Disney executive, said the first co-production partnerships would be announced within weeks. He would not comment on which Hollywood studios ADMC would work with, but highlighted its link with Warner Bros for video games development. It was also looking to work with film-makers in India, the UK and around the Middle East.

Coming out of the shadow of Dubai

The Times:

Abu Dhabi’s rulers realise that it will take more than one-off projects to secure their future. They know that it must be based on trade, financial services and tourism – and that there is a place for such a global centre to develop between the European and Asian time zones. THE fly in the ointment is that they have a rival, Dubai, a fellow member of the United Arab Emirates which is only 90 minutes away up the desert highway.

“The UAE is supposed to be one federal state but, crucially, when it was created in 1971 each of the emirates retained the right to keep its natural resources and therefore its own economic path,” explained Christopher Davidson, a Middle East expert at Durham University. “Now we are beginning to see different emirates drift away from each other more and more.”

For Dubai, the need to diversify is more pressing. It has less than 1% of the oil reserves of Abu Dhabi and the wells are projected to run dry in 20 years. This has led to the ruling Maktoum family sanctioning a development programme in Dubai the likes of which the world has never seen before. New islands have been built alongside the world’s deepest man-made port. The world’s biggest airport – bigger than Cardiff in area – and the 1km-high Al Burj tower are under construction. This is not to mention the 500 hotels being built. In total an estimated £500 billion has been spent on new infrastructure.

Abu Dhabi looks with slight disdain at Dubai’s rapid expansion. “It’s a well known joke that they built the city first and then thought about designing it,” said Martin Freeman, a British management consultant who has worked in Abu Dhabi for three years. “Abu Dhabi is a more considered place. Here they are designing the city and then building.”

Oh dear, there's that Christopher Davidson dude, again.

Don't cry for Abu Dhabi

Brad Setser has a piece on year on year changes in oil revenue for Saudi Arabia which - refering to the recent dip in prices - he titles Don't Cry for Saudi Arabia. He goes on to discuss Abu Dhabi's revenues and what they're doing with them.

Most people couldn't find the richest city in the world on a map

Fortune:

"We move fast," Khaldoon says, his crisp, white headscarf whipping in the wind. "Think about it: How many places in the world can you say, 'I'm going to establish an airline,' and boom, two years later you have 21 planes and 37 destinations? How many places in the world can you say, 'I need 15,000 hotel rooms,' and boom, you have 100 new hotels in the works? How many places can you say, 'I want world-class hospitals, universities, and museums,' and boom, the Sorbonne, Cleveland Clinic, Guggenheim, and Louvre are on the way?"

Welcome to Abu Dhabi, the capital of the United Arab Emirates and the richest city in the world. The emirate's 420,000 citizens, who sit on one-tenth of the planet's oil and have almost $1 trillion invested abroad, are worth about $17 million apiece. (A million foreign workers don't share in the wealth.) Yet most people couldn't find Abu Dhabi on a map. Khaldoon's job is to change that. Tall, handsome, and politically savvy, he wants to make his hometown mentioned in the same breath as Singapore, Tokyo - and yes, Dubai.

But does the UAE, a federation of seven emirates strung out along the Persian Gulf, need another Dubai just a two-hour drive away? Does it need another long-haul airline, another financial center, another tourism destination, another billion-dollar hotel? "The short answer," says Khaldoon, "is yes. But I don't like to use comparisons with Dubai. We're not trying to be Dubai. What they've done is phenomenal, and we're very proud of it. But here we have a unique opportunity to get it right."

Read it all. Thanks to A Year in Exile for the link.

Abu Dhabi Investment Authority comes out

Sort of.

The International Herald Tribune:

After decades in the shadows, the fund, the Abu Dhabi Investment Authority, is turning heads on Wall Street and in Washington by making high-profile investments in the United States and elsewhere.

Known as ADIA (pronounced ah-DEE-ah), the fund recently formed a small team that is now buying big stakes in Western companies. This unit masterminded ADIA's $7.5 billion investment in Citigroup, the largest U.S. bank, in November. It has also taken a large position in Toll Brothers, one of America's biggest home builders.

"There is an idea that Abu Dhabi should not be the underdog of the map," said Frauke Heard-Bey, a historian who has written a book about the political emergence of the United Arab Emirates. "They have the money to buy companies that are ailing, and why should they not? Why not make a mark?"

ADIA is the largest of the world's sovereign wealth funds, giant pools of money controlled by cash-rich governments, particularly in Asia and Middle East. But Abu Dhabi, the wealthiest of the seven Arab emirates, says little about its fund. Few outsiders know for sure where ADIA invests, or even how much money it controls. And secrecy breeds hyperbole; some estimates of the fund's size exceed $1 trillion.
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Since ADIA's genesis in 1976, the fund has followed a conservative investment approach. It has farmed out its assets to foreign money managers and taken stakes in companies based upon their weighting in benchmark stock indexes like the Standard & Poor's 500. ADIA is also one of the largest institutional investors in hedge funds and private-equity funds. This approach has served ADIA well and reflects the strongly felt notion that the fund's ultimate purpose is to serve as a financial reserve for Abu Dhabi in times when oil revenues are less robust.
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With oil at about $100 a barrel, bankers and analysts estimate Abu Dhabi produces a surplus of at least $50 billion a year. Given the emirate's small population, 80 percent of which is foreign born, even the most expansive investment and welfare policies make it hard to put a dent in such a sum.
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People who worked at ADIA from its earliest days in the late 1970s and 1980s say that the fund's reticence dates to its formation.

Some see this as a reflection of Abu Dhabi's small size, insular culture and geographical vulnerability, a sense that the less that is known about the specifics of ADIA's hoard, the better.

"ADIA does not answer to a wide public at home," said David Mack, a former United States ambassador to the United Arab Emirates.

"They are a small country in an area with some nasty countries like Iran that can make trouble for them. They don't like to advertise."

Actually, there is a public to answer to. Part of the balancing act is to make sure the citizenry remains content with the welfare system. You might think that part of that strategy would be to keep the public ignorant of the size of the country's wealth. But you might be wrong.

The Abu Dhabi translation project

Bloomberg

As part of efforts to transform the emirate into the cultural lodestone of the Middle East, the Abu Dhabi Authority for Culture and Heritage, or Adach, has chosen 100 books to be translated into Arabic. Among them are Alan Greenspan's memoir, ``The Age of Turbulence,'' John Maynard Keynes's ``The General Theory of Employment, Interest and Money'' and Milton Friedman's ``Capitalism and Freedom.'' The goal is to translate 100 titles every year.

Adach has formed a nonprofit organization called Kalima (Arabic for ``word'') to undertake the translations and expand Arabic-language publishing in the United Arab Emirates.

About 10,000 books have been translated into Arabic in the past millennium, according to a 2003 study by the United Nations Development Program. The demand has been small, partly owing to the historical tendency to focus most reading on religious texts and classical poetry. Some 300 new translations appear each year, so Kalima's further 100 titles represents a substantial addition.

Kalima will buy rights, pay translators and enlist established Arabic-language publishers in the Persian Gulf region and North Africa to print and distribute the books.

See the world and buy it up, all the day you'll have good luck

Benjamin Franklin made famous the saying, "see a penny, pick it up, all the day you'll have good luck." He also said, "neither a borrower nor a lender be."

Whatever. Flush with cash, oil exporting countries are looking for some place to stick it. The New York Times reports:

“If you look at gulf countries, they have a total common economy that is about the size of the Netherlands,” said Edward L. Morse, chief energy economist of Lehman Brothers. “These are tiny countries, but they have to place collectively over $5 billion a week from their oil revenues. It’s not an easy thing to do.”
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Though oil-producing countries have been looking at investments in the West since the 1970s, their strategies back then were largely confined to safe assets with a low return, like United States Treasury debt.

By 2001, with the collapse in oil prices, many of the oil exporters had depleted their dollar reserves, economists say.

But the boom in oil prices in the last five years has changed all that. It has persuaded oil producers to set up or expand “sovereign wealth funds” as vehicles to invest far more aggressively in the West, in their own economies and in emerging markets.
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“The oil-producing countries simply cannot absorb the amount of wealth they are generating,” said J. Robinson West, chairman of PFC Energy. “We are seeing a transfer of wealth of historic dimensions. It is not just Qatar and Abu Dhabi. Investment funds are being set up in places like Kazakhstan and Equatorial Guinea.”
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Recently Ben S. Bernanke, chairman of the Federal Reserve, has spoken of a “global savings glut” that has lowered interest rates worldwide. Ms. Farrell, of the McKinsey Institute, estimates that petrodollars may have kept American interest rates three-quarters of a percentage point lower than they would otherwise be, a direct benefit to American consumers.

A closer look at the Citigroup deal with Abu Dhabi

The New York Times takes an extensive look at the Citigroup-Abu Dhabi deal:

Despite its size, Abu Dhabi’s royal family has been largely content to pour money into low-return, low-profile investments — until now.

But Abu Dhabi, the largest oil producer of the seven city-states that compose the United Arab Emirates, is worried enough about the eroding value of its pile of petrodollars that it appears ready to pursue more big-ticket deals.
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While Abu Dhabi contains about 94 percent of the oil reserves in the U.A.E. and includes about 87 percent of the country’s land mass, the city-state’s international profile has paled in recent years in contrast to that of its neighbor, Dubai.

Thanks to a series of big-name deals and an audacious growth strategy, Dubai is becoming a tourism destination, a regional financial center and a favored buyer of marquee assets. On Monday, Dubai International Capital said it had bought a substantial stake in the Sony Corporation.

“They are different animals,” said David Butter, the Middle East regional head at the Economist Intelligence Unit, comparing Dubai’s growth strategy with Abu Dhabi’s. “The purpose of A.D.I.A. is to invest surplus cash in assets that would provide steady gain and returns over time,” he said, while Dubai, with less oil reserves, has had to create its own sources of wealth.
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Like other sovereign wealth funds, the Abu Dhabi fund is looking for investments to help diversify foreign currency reserves earned from exporting oil.

Its shift in investment strategy is not immediately being accompanied by an increase in public transparency. Several calls to the company’s headquarters in Abu Dhabi went unreturned.

Abu Dhabi will invest $7.5 billion in Citigroup

Los Angeles Times today:

Citigroup Inc., suffering huge losses on mortgage-related securities, said late Monday that an arm of the Abu Dhabi government would invest $7.5 billion in the giant U.S. bank.

The cash infusion would give the Abu Dhabi Investment Authority a stake of as much as 4.9% in Citigroup.
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Abu Dhabi, one of the United Arab Emirates, is buying from Citigroup equity units that would pay an 11% annual dividend and be converted into Citigroup common stock in 2010 and 2011 at prices of $31.83 to $37.24 a share, depending on the bank's stock price at that time.

Before the deal was announced, Citigroup shares fell $1, or 3.2%, to $30.70. They are off 45% this year.

Citigroup said Abu Dhabi would have "no role in the management or governance of Citi, including no right to designate a member" of its board.

Abu Dhabi. You know the one. Or is it Abu Dubai? Or Apple?