In Dubai World deals reflect shimmer, thoughts glitter

Mired in mirage

Dubai, which has been struggling to recover from economic meltdown, failed its first solvency test when late on Wednesday, the government-owned conglomerate Dubai World announced that it would not be paying the US$3.5 billion installment of Islamic bank loans in December.

The terse statement came in the middle of negotiations between creditors and Dubai World, the corporate arm of Dubai, which has led many of its most ambitious real estate projects, but is now struggling under the burden of US$59 billion in liabilities.

For the banks that financed the debt-fueled ascent of Dubai —— analysts’ estimates put its total debt at about US$80 billion —— the move by Dubai to obtain a standstill highlights a truth that many in the region had been trying to make clear to bankers.

The announcement was made shortly after two banks in neighbouring Abu Dhabi bought US$5 billion in a second US$10 billion bond issue this year. The purchase was seen as a second test for cash-strapped Dubai —— which it met.

Dubai World asked for a debt standstill until May 2010 while it restructures. Between 12,000-20,000 of its 70,000 employees have already been dismissed and further firings are in the cards, a Dubai World source told Deccan Herald.  The dismissals will include hundreds of Indians and other sub-continentals employed in management positions in the various firms belonging to the conglomerate which includes the profit-making gold, silver, precious stones and tea exchanges. Nakheel, which developed luxurious off-shore island residence and resort complexes, The Palm and The World, are the hardest hit.

Chunk of debt

Dubai world, which owes US$59-60 billion of the emirate’s total debt of US$84 billion, has been devastated by the Nakheel’s debts.  Real estate prices have plunged by 40-50 per cent over the past year and are expected to fall by another 20 per cent.  
Most construction has been frozen and new projects abandoned, although the Dubai metro became operational in September and Borj Dubai, the world’s tallest tower, has been completed and is slated to open in January. Borj Dubai was built by Indian skilled and unskilled labour. It is estimated that 42 per cent of Dubai’s workforce is Indian.

Dubai World is run by Sultan Ahmed bin Sulayem, a close adviser to Dubai’s ruler, Sheik Mohammed bin Rashid al-Maktoum, who has insisted publicly that Dubai and Abu Dhabi will work together to reach a solution on the debt question.

It was expected that the senior member of the United Arab Emirates federation to which Dubai belongs, oil-rich Abu Dhabi, would provide the assistance needed to see Dubai through the crisis. But it refused to write a bailout cheque.