VZCZCXRO4038
PP RUEHDH RUEHDIR
DE RUEHDE #0516/01 3351315
ZNY CCCCC ZZH
P 011315Z DEC 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 6734
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 0028

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000516 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR E, NEA/FO, EEB/FO, EEB/IFD, AND NEA/ARP (MCGOVERN) 
 
E.O. 12958: DECL:  12/1/2019 
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI FINANCE UPDATE 
 
REF: A. A) ABU DHABI 1114 
     ¶B. B) ABU DHABI 799 
 
DUBAI 00000516  001.2 OF 003 
 
 
CLASSIFIED BY: Justin Siberell, Consul General. 
REASON: 1.4 (b), (d) 
This message drafted jointly by Consulate General Dubai and 
Embassy Abu Dhabi 
 
 
 
 
 
¶1. (C) SUMMARY:  Dubai and Abu Dhabi financial markets plunged 
in Monday and Tuesday trading, the first market openings since 
Dubai World's announcement of six month moratorium on debt 
repayments (ref A).  A senior Dubai finance official distanced 
the Dubai government from Dubai World's non-sovereign debt in 
the clearest sign to date that Dubai World, as well as Dubai's 
other government-related entities (GREs) cannot expect a 
government bailout, local or federal.  In response, Dubai World 
executives announced the company is in direct contact with 
creditors.  The banking sector appears to be faring better than 
expected, and the impact on Abu Dhabi may be less than initially 
believed.  END SUMMARY. 
 
 
 
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UAE STOCKS DOWN SHARPLY AT MARKET OPENING 
 
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¶2. (C) UAE stocks plunged on November 30, the first day of 
trading since the Dubai World debt announcement, and there were 
additional losses in December 1 trading.  The Dubai market index 
lost 7.3 percent and Abu Dhabi was down 8.3 percent on the 30th, 
for a one day loss of over USD 10 billion in market 
capitalization.  Banks and real estate firms' clocked large 
losses on UAE exchanges, as was widely expected, but investors 
dumped everything from telecom giant Etisalat (down 9.7 percent) 
to the start-up Air Arabia (down 9.6 percent).  Brokers 
complained in media reports that there were no buyers in the 
market, and analysts noted most investors would have sold at 
even lower prices if buyers could be found.  It was however 
difficult to judge the broader regional impact of the crisis 
since some of the GCC markets remain closed for the Islamic Eid 
holiday, most notably Saudi Arabia.  The reopening of Saudi 
Arabian exchange, which is the largest in the Gulf by market 
capitalization, on December 5, will provide a better idea of the 
possible spillover effect of the Dubai World debt announcement. 
 
 
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CLARIFICATIONS CONTINUE 
 
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¶3. (C) A statement by Dubai World early morning December 1st 
that the company is in direct talks with creditors seems to have 
contributed to the improvement in global markets.  Dubai World 
characterized its discussions with creditors as "constructive" 
towards restructuring at least USD 26 billion of its debts, 
which include USD 6 billion from beleaguered Palm Island 
developer Nakheel.  Prior to the crisis, DP World CEO Sultan bin 
Sulayim told Consul General that while DP World's debt load was 
considerable, he was confident that creditor banks would be 
willing to refinance to extend maturity dates given that DP 
World loans were backed by assets, including substantial amounts 
of Dubai property.  Part of the DP World restructuring will 
include sales of DP World assets outside the UAE, albeit at 
considerable loss.  If managed correctly, the refinance 
discussions with creditors and sales of assets may be the 
conglomerate's best effort yet to begin to meet its considerable 
2009-2011 debt obligations.  Also, fixed income analysts assert 
that the USD 4 billion in Sukuk bonds owned by Nakheel are also 
implicitly backed by assets consisting of the lease hold 
interest in all lands, buildings and other property known as DWF 
South and Crescent Lands at Dubai Waterfront, which could be up 
for grabs. 
 
 
 
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NO GURANTEES FOR DUBAI WORLD SAY AUTHORITIES 
 
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DUBAI 00000516  002.2 OF 003 
 
 
 
¶4. (C) In an important statement Monday, Dubai Finance 
Department Director General Abdul Rahman Al Saleh declared the 
Dubai Government's distinction between sovereign and private or 
corporate debt.  In comments to the press, Saleh asserted that 
"sovereign debt is covered by a sovereign guarantee, while 
commercial debt is like a loan taken by any commercial entity in 
the market and is not guaranteed."  Saleh further declared that 
investors bear responsibility for assuming government guarantees 
for DP World where none were in fact guaranteed.  "It is not 
correct to assume that Dubai World is part of the Government of 
Dubai.  The lenders should bear part of the responsibility," he 
said.   The statement corroborates what Treasury Attachi heard 
from senior UAE Central Bank sources over the weekend wherein 
Abu Dhabi would back Dubai sovereign debt but not defend 
"private" debt built up by Dubai GRE's over the past several 
years.  And while market participants are beginning to digest 
these assertions, they go against a widely-held expectation that 
either the Dubai or Abu Dhabi governments would ultimately back 
Dubai GRE obligations.  The fact that they won't is a severe 
blow to the credibility of the Dubai-based companies that led 
development here and will make it very difficult for such 
companies to raise financing for the foreseeable future. Chief 
Economist at National Bank of Abu Dhabi, Giyas Gokkent, told 
Econ Chief that no Dubai-based entity will be able to access 
credit markets in the foreseeable future. 
 
 
 
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DUBAI'S GLOBAL BRAND AT RISK 
 
---------------------------- 
 
 
 
¶5. (C) Despite calls from Dubai government officials that Dubai 
Sovereign not be too closely tied to the default of Dubai World, 
some participants in the bond market remain convinced that both 
remain inextricably linked.  Dubai's brand may be tarnished for 
the foreseeable future despite the government's best efforts to 
reshape the argument about sovereign versus private debt. 
Sharif Eid, a bond specialist and Asset Manager at Dubai based 
Algebra Capital, told econoff that in the short-term, Dubai 
sovereign and private companies have a real black stain in the 
debt markets and should only expect to pay very high spreads for 
future bond offers.  The news about Dubai World's perceived 
default has sullied its global brand, especially as a market 
leader in the Gulf and MENA region, according to Eid. 
 
 
 
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DUBAI'S DEBT ANNOUCEMENT POORLY MANAGED 
 
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¶6. (C) The market has generally viewed Dubai government's 
handling of the Dubai World announcement as a sign of its 
continued lack of transparency.  A bond analyst from EFG Hermes 
noted to econoff that although senior Dubai government and Dubai 
Inc. officials continue to spin the announcement as something 
that was planned and anticipated, Dubai officials have 
unwittingly created a real credibility gap in the eyes of 
investors.  Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the 
Supreme Fiscal Committee in charge of apportioning financial 
support to ailing companies, said last week that the Dubai 
Government had "full knowledge of how the markets would react" 
and would provide more information soon after the Islamic Eid Al 
Adha holiday.  The UAE begins two more days of holidays 
associated with UAE National Day on December 2.  We do not 
expect further clarity from senior Dubai officials until after 
the country returns to work December 6. 
 
 
 
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BANKING SECTOR DOWN, BUT NOT OUT - THE VIEW FROM ABU DHABI 
 
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¶7. (C/NF) Initial concerns about the ability of the UAE banking 
sector to withstand the crisis may prove to be exaggerated. 
 
DUBAI 00000516  003.2 OF 003 
 
 
Gokkent told EconOff on December 1 that most UAE banks improved 
their liquid positions significantly in the past year and have 
applied increasingly prudent lending practices.  However, even 
government-related banks were caught off guard by the Dubai 
World announcement.  The economist said NBAD - the largest bank 
in Abu Dhabi and second largest in the UAE - always predicted 
Dubai would ultimately repay its debts.  (Note: NBAD announced 
on November 30 its total Dubai World exposure (to Nakheel and 
Limitless) is less than USD 350 million. End Note.)  While 
Standard and Poor's placed Abu Dhabi Commercial Bank on credit 
watch on November 30, it is unlikely the Abu Dhabi Investment 
Council, which owns over 60 percent of the bank, will let it 
fail.  Several Dubai banks reportedly took advantage of Central 
Bank liquidity provisions announced in 2008 in the fall of 2009 
to shore up their balance sheets.  The Central Bank's new 
liquidity provision is also available, although the decision 
seems to be more of a cosmetic effort to prevent a bank run that 
did not materialize than a necessary step at this point. 
 
 
 
¶8. (CN/F) Despite the Abu Dhabi market drop, Abu Dhabi's 
financial position appears to remain comfortable.  Standard and 
Poor's reaffirmed Abu Dhabi's strong AA/A-1+ credit rating on 
November 25.  While ahead of Dubai's standstill announcement, 
the emirate and its government related entities (GREs) remain 
well positioned to ride out the storm.  Oil, which contributes 
over 60 percent of Abu Dhabi's GDP, remains priced at a 
comfortable USD 75 or higher.  Abu Dhabi and several of its 
large GREs (e.g., investment firm Mubadala and developer Aldar), 
successfully issued over USD 7 billion in bonds over the summer 
(Ref B).  Abu Dhabi's fiscal and trade position remain strong, 
likely encouraging investors to continue to view it on par with 
Qatar, rather than Dubai.  Despite its relative strength, there 
is still much about Dubai's situation that likely concerns Abu 
Dhabi officials, as the government, private sector, and 
individual citizens still hold significant investments in Dubai, 
particularly in real estate. 
 
 
 
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COMMENT 
 
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¶9. (C/NF) While many in the UAE had hoped that the worst of the 
economic crisis was behind them, reality is beginning to set in 
that 2010 may actually be worse than 2009.  Real estate and 
other asset prices will likely continue to decline, particularly 
in Dubai, which already witnessed real estate declines of over 
40 percent in some areas.  Dubai Government spending may 
contract, as trade volumes, tourism and financial sector also 
continue to weaken in the coming months.  While it is now clear 
that there is no government bail-out for Dubai World, some form 
of support from Abu Dhabi is likely still in the cards, 
particularly if GCC markets see similar declines to UAE markets 
and fears of a significant regional impact materialize.  END 
COMMENT 
SIBERELL