Published: January 9, 2009
In late November, the UAE government quietly announced the creation of a new federal bank, called Emirates Development Bank, that will merge the assets of two large mortgage banks from Dubai – Amlak and Tamweel – and one smaller mortgage bank from Abu Dhabi, the Real Estate Bank.
Amlak and Tamweel, which together account for 70% of the Dubai mortgage market, have been struggling for some weeks – their share prices have both sunk by 80% this year.
They are not the only Dubai entities in trouble. The highly-leveraged Dubai real estate market has been hit in the fourth quarter by a lack of external financing, investor concerns about the sustainability of Dubai’s debt levels, and a string of corruption charges in the real estate sector.
Privately, many investors had been hoping that Dubai’s neighbouring Emirate, Abu Dhabi, would step in to support Dubai before any Dubai company got into trouble with debt servicing. Abu Dhabi has around US$800bn in reserves built up from its oil revenues.
However, the political climate of the UAE makes any such intervention highly sensitive. Although the UAE is one country with a federal government and federal bank, the Emirates are still very much separate entities, ruled by their own sheikhs, and dominated by their own companies and banks.
This much was emphasised at the Abu Dhabi Investment Forum in London in early November, when around 600 investors gathered to meet officials from the Emirate.
The main concern on their mind was the fact that the CDS on Dubai quasigovernment debt had risen to over 1,000 basis points, which usually indicates the probability of default.
Dubai state-owned entities have around US$40bn in loans to re-finance next year, the bulk of it short-term, and investors had concerns as to whether Dubai would be able to meet its obligations. Obviously, a default by any government-owned entity would be disastrous not just for Dubai, but for the entire UAE.
But none of the Abu Dhabi officials or the bankers speaking at the Forum wanted to even mention Dubai. Georges Makhoul, president of Middle East and North Africa for Morgan Stanley, replied to one question from the floor regarding Dubai: “I’m not here to speak about Dubai. I can only speak about it offline.”
Nonetheless, investors have been hoping that some form of support, explicit or implicit, would come from Abu Dhabi for its struggling neighbour. For them, the federal takeover of Amlak and Tamweel is an encouraging sign.
Hasan Mustafa, head of debt syndicate for CEEMEA at RBS, says: “The crisis has definitely brought the Emirates closer together. There’s been no public announcement, but in a quiet way there has been support. Abu Dhabi is likely to do more to support all other emirates including Dubai going forward.”
Husam Hourami, partner at Al-Tamimi & Company, a leading law-firm in the UAE, says: “In general, there has been a switch from competition to cooperation. The Dubai model was very much to set up different structures to compete with each other. Now, it has established an advisory committee to ensure all government entities meet their obligations. And we’re also seeing more cooperation at the federal level.”
In late November, Mohammed Ali Alabbar, chairman of Emaar Properties, one of the biggest state-owned companies in Dubai, announced that a special advisory committee had been established, bringing together the heads of the main state-owned entities, to report to Sheikh Mohammed Bin Rashid Al Maktoum and coordinate how to bring “the current and future supply of new projects onto the market”.
Alabbar said: “We will formulate recommendations based on our findings, which will then be submitted to the government for action and implementation.
We will act in a timely manner, and we will be transparent in those actions.” He added: “We can and will meet our obligations.”