Feb 23, 2009 | 18:57 GMT

6 mins read

UAE: Dubai Issues Bonds

Hit hard by the global financial crisis, Dubai issued bonds on Feb. 22 as a means to raise $10 billion in cash to meet its financial obligations, which were bought by the United Arab Emirates' central bank. Although Dubai is attempting to avoid taking loans from the UAE's wealthiest emirate, it cannot prevent dependency on Abu Dhabi because of that country's control of the central bank. This is just the first step in the process of Abu Dhabi gaining influence over Dubai, and how far it goes depends on the duration of the international financial crisis.
The government of the emirate of Dubai said Feb. 22 it had sold $10 billion in five-year unsecured bonds to the central bank of the United Arab Emirates, which is the first half of a $20 billion program. The United Arab Emirates is a loose federation of seven Persian Gulf Arab emirates and Abu Dhabi is the largest and wealthiest emirate given its oil resources. Dubai is the region's financial hub and the second richest emirate, although it has struggled since the onslaught of the global financial crisis, which hit Dubai the hardest in the Middle East region. Unlike Abu Dhabi, Dubai does not have robust oil and gas resources and has instead developed into the region's financial center. In 2008, a mere 8 percent of Dubai's gross domestic product (GDP) came from energy with the rest coming from financial services and investments. As a result, it was only natural for Dubai to be the most susceptible to the international financial troubles in the region. Given Dubai's liquidity issues, the region has focused on its ability (or the lack thereof) to meet its financial commitments. While international credit agencies and Dubai's stock market have reacted positively to the move to issue bonds, the al-Maktoum rulers of Dubai remain concerned that their attempts to prevent the al-Nahyans of Abu Dhabi from gaining influence over cash-strapped Dubai are not achieving much success. Despite the fact that Dubai has not opted for a loan from Abu Dhabi and they are trying to deal with the situation through the institutional mechanisms of the United Arab Emirates federal government — in which they have a considerable say — there is no way that they can bypass the largest and most oil-rich emirate. This is clear from the fact that the United Arab Emirates central bank, which is dominated by Abu Dhabi, bought up all the bonds and did not allow the instruments to be sold on the market. State-owned Investment Corp. of Dubai (ICD) had to provide up to $2.3 billion of the $3.4 billion that Borse Dubai (BD) needed to refinance an existing syndicated loan, Reuters reported Feb. 19. Bankers with knowledge of the deal said that only $1.2 billion of the $2.5 billion was raised from foreign banks, while the remaining $1.3 billion was provided by state-owned Dubai banks after ICD deposited cash with them. According to the bankers, ICD was able to meet the $1.3 billion loan payment and the $1 billion equity injection by using proceeds of its own $6 billion syndicated loan made in November 2008. Dubai was forced to engage in this re-shuffling of cash because private markets in the current international financial environment were limited in their efforts. But maneuvering finances has its limitations and Dubai is in need of a capital injection. It had the option of seeking a loan from cash-rich Abu Dhabi or opt for issuing bonds. The former automatically makes it financially — and politically — indebted to Abu Dhabi. The latter approach potentially allows Dubai to somewhat manage how dependent it will become on Abu Dhabi by tapping other sources of capital — which also has limitations given the sharp decline in oil prices. While Dubai and the other smaller emirates have representation in the country's central bank, Abu Dhabi dominates the institution because of its considerable financial superiority. In other words, the purchase of the central bank's purchase of Dubai's bonds translates into more influence for Abu Dhabi. Though this had been expected, today's development marks the first step in Abu Dhabi making financial inroads into Dubai. Although the $10 billion transaction is small by wealthy Gulf states' standards, it represents the beginning of a process by which Abu Dhabi likely will gradually increase its influence in Dubai and within the United Arab Emirates. Dubai's ability to restrict Abu Dhabi's influence is a function of how much help it will need before it can get out of the crisis. From Abu Dhabi's point of view, it would like to be able dominate the country, and the financial morass that Dubai finds itself in is an opening for the largest and wealthiest emirate to use its financial power to pursue this objective. Thus far, Abu Dhabi plans to achieve its goal in two ways, the first of which is the central bank's move to purchase Dubai's bonds. The second way involves luring the expatriate technocratic workforce from Dubai's financial sector, which is aided by the fact the United Arab Emirates has strict rules about foreign workers remaining in the country. Foreign workers have only 30 days to find another job that will provide a visa or government sponsor for them to stay and work in the country tax-free. With many of them losing jobs in Dubai, they would be tempted to relocate to Abu Dhabi in order to regain employment and maintain legal status with UAE's immigration authorities. Though exact figures are unavailable, major investment firms such as Goldman Sachs Group, Morgan Stanley, and Credit Suisse Group reportedly laid off scores of workers in Dubai in January, sending more and more resumes of skilled white-collar expatriates toward Abu Dhabi. In the long-run this means that Abu Dhabi — in addition to being an energy powerhouse in the region — can also emerge as a financial center by absorbing Dubai's expatriate skill set, potentially setting Dubai behind its economic rival by several years. And with its financial foundation built on energy exports, Abu Dhabi has the financial cushion to avoid the fate of Dubai, with the added bonus of diversifying its economy through a growing financial sector. In the process, Abu Dhabi would like to avoid tensions with Dubai that could affect the United Arab Emirate's global image as a fruitful region of investment, but it will not let the opportunity to consolidate its dominant position in the country slip away.

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