Feb 19, 2009 | 19:37 GMT

5 mins read

United Arab Emirates: The Financial Crisis and Abu Dhabi-Dubai Relations

Due its exposure to the international credit system, the emirate of Dubai is the Middle Eastern economy hit hardest by the global financial crisis. The effects are such that Dubai will need help from the more powerful, oil-rich emirate of Abu Dhabi. While it will struggle to limit the extent to which it has to accept financial assistance from Abu Dhabi, it is unlikely that Dubai can altogether avoid the dependency. As a result, there will be a further tilt in the balance of power toward Abu Dhabi, which will assume a more dominant position in the seven-emirate federation of the United Arab Emirates.
Sultan Ahmed bin Sulayem, chairman of state-owned firm Dubai World, said Feb. 17 that the United Arab Emirates is preparing a plan to help domestic banks resume lending. In an interview with Bloomberg, Sulayem — who also sits on the committee examining the effects of the international credit crisis on Dubai's economic health — explained that the UAE central bank and federal government were working on a plan to lend money to ailing state-owned enterprises and financial institutions. These comments follow Feb. 8 reports quoting Sheikh Mohammed bin Zayed al-Nahyan, chairman of the Abu Dhabi Council for Economic Development, as saying that Abu Dhabi should lead federal efforts to ease the economic slowdown across the seven-emirate federation. Four days before that, the government announced that Abu Dhabi's top banks would receive a total of $4.4 billion from the government to buffer losses from the global credit contagion. Abu Dhabi, with its massive oil wealth and the world's largest sovereign wealth fund, is the major power in the United Arab Emirates. Dubai is in second place because of its status as the Persian Gulf's financial hub; the five lesser emirates — Ajman, Umm al Qaywayn, Ras al Khaymah, Al Fujayrah and Sharjah — follow. Dubai's financial clout (from its tourism, trade, real estate and financial services industries) historically has given it enough power that its ruling al-Maktoum family has held the UAE federal government positions of vice president, prime minister and defense minister. The al-Nahyans of Abu Dhabi have held the federation's presidency since its inception in 1971 and retained control of it when the country's first (and until then, only) president, Sheikh Zayed bin Sultan al-Nahyan, died in 2004. The power-sharing arrangement between the al-Nahyans and the al-Maktoums has been the political foundation upon which the United Arab Emirates has not only maintained domestic stability, but also emerged as a major international economic and financial player, acquiring assets around the world. This was the case up until the global financial crisis began spreading throughout the world. Abu Dhabi has not been immune, as is evident from the need to inject cash into the emirate's banking system. But Dubai has been hit the hardest because of its exposure to the international markets, and particularly because its real estate bubble crashed when global credit that had been used to fund enormous, fanciful construction projects became scarce. Due to the relative lack of transparency, the extent of the financial carnage in Dubai was not readily apparent. But on Feb. 2, the international credit rating agency Moody's announced that it would be downgrading the ratings of six of Dubai's largest state-owned firms, including global port operator Dubai Ports World and Emaar Properties, the developer responsible for the partly-constructed world's tallest building, located in the city's center. Utility operator Dubai Electricity and Water Authority, conglomerate Dubai Holding Commercial Operations Group, industrial park and trade zone operator Jebel Ali Free Zone and Dubai International Financial Center Investments, a branch of Dubai's 4-year-old international financial center, also are in line for downgrades. Dubai reportedly has $90 billion in assets, but because of the opaque nature of its balance sheets it is unclear whether these assets are easily convertible to hard cash, which would allow the firms to raise short-term capital to meet their obligations. Its actual financial weakness notwithstanding, Dubai has been reluctant to seek assistance from the cash-flush Abu Dhabi, given the larger political challenges associated with doing so. Even though it is not raking in the billions it was collecting when oil prices were high in mid-2008, Abu Dhabi has been very financially prudent (in sharp contrast to Dubai). It still has enough of a cushion to bail out itself as well as Dubai, as its sovereign wealth fund was estimated at $328 billion at the end of 2008, according to a study by economists at the Council on Foreign Relations. Dubai is unlikely to be able to avoid the need for financial assistance from Abu Dhabi, but it wants to be sure that accepting that assistance will not further empower Abu Dhabi. This is why the issue is being framed in the context of a national economic stimulus package. From Dubai's point of view, the bailout should not be a matter between the two emirates, but a decision made by the national government, in which Dubai has considerable say. There are two problems with this. First, Dubai is the one that needs most of the assistance, and Abu Dhabi is the only emirate in a position to extend help. Second, the structure of the United Arab Emirates is that of a loose federation, which means the ruler of each emirate has a great degree of autonomy. Together, these two structural factors make it very difficult for Dubai to prevent Abu Dhabi from gaining disproportionate influence, both in their bilateral relations and over the federation. And yet, no matter what Dubai tries to call it, it is very apparent that the emirate needs help and needs it fast. Depending on the nature of the financial arrangement, Abu Dhabi could end up having a major stake in Dubai. But Abu Dhabi, in the interest of maintaining balance in the federation, does not want Dubai to feel threatened. Therefore, in the short term, this emerging imbalance of power is unlikely to create any serious ruptures. But depending upon the extent of the bailout and Dubai's future financial position, there could be friction between the two emirates, which could have a negative impact on the United Arab Emirates' stability.

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