Indians relieved as Abu Dhabi comes to Dubai's rescue

This sum, on top of another $15 billion provided directly and indirectly this year, could enable Dubai’s flagship company Dubai World to restructure and make arrangements with creditors for payment of $26 billion out of the conglomerate’s total debt of $59 billion.

Thousands of Indian construction labourers, engineers, public relations experts, clerks, bankers, and managers should also be reassured by the potential Dubai still represents. Although analysts do not predict that Dubai will return to the days of the bubble, the emirate’s glittering glass-sided high rises and extensive infrastructure will not melt away. Public and private firms which have been forced to retrench by the current crisis will eventually recover and hire Indians.

Dubai could emerge stronger from the debacle because of the intervention of Abu Dhabi, which has 90 per cent of the UAE’s oil. It cannot afford to allow Dubai to crash. Abu Dhabi the senior member of the seven member UAE federation.

Dubai’s melt-down could have precipitated crises in the entire federation, threatening its existence. The disintegration of the union would have been catastrophic for the 2.3 million Indians employed in the UAE.

On the personal side, Abu Dhabi’s ruler and federation president, Shaikh Khalifa bin Zayed al-Nahyan, had to help resolve the economic difficulties faced by Dubai’s ruler, federation vice president and prime minister, Shaikh Muhammad bin Rashid al-Maktoum. The clansmen, often rivals, had to work together to deal with Dubai’s debt. Their fathers forged the federation; they could not wreck it.

Dubai’s economic slide had already begun to affect the federation as a whole. The UAE had a -0.2 per cent growth rate for 2009. If Dubai were to default on its debts, growth in the UAE could continue to decline instead of rising to 2.4 per cent for 2010 and 3.4 per cent for 2011, as predicted by the IMF.

Abu Dhabi’s market, in particular, had registered sharp fluctuations in stock prices since Dubai World announced its intention to postpone payment. Exchanges in both Abu Dhabi and Dubai saw gains as soon as Abu Dhabi announced its decision. Global markets, negatively affected by Dubai’s proposed default, also rallied.

Abu Dhabi could not refuse to bail out Dubai on financial grounds. Abu Dhabi, which earned about $43 billion in 2009 from crude exports, sits on top of eight per cent of the world’s oil reserves and Shaikh Khalifa controls one of the largest sovereign wealth funds, estimated to be worth about $500 billion. Abu Dhabi’s external assets are valued at $300 billion, more than three times Dubai’s estimated debt of $84 billion. Abu Dhabi has a manageable external debt of $56 billion. Furthermore, Abu Dhabi is snapping up foreign properties and constructing luxury hotels, marinas, and shopping malls.

Defaulting on sukuk

Abu Dhabi cannot permit Dubai World to default on Islamic bonds, or sukuk, because this could harm the global Islamic banking and finance sector. Sukuk are advertised as superior to interest yielding bonds because sukuk are tied to actual assets and their return is regarded as rent. Interest is prohibited under Sharia, Islamic law. Furthermore, Islamic banks hold that they are more attractive because they are more conservative than the mainly western banks which have created the global financial crisis.

Although a US firm, a Kuwaiti company and a Saudi group have defaulted on sukuk, their debts were far smaller than the $4.1 billion due to be paid this month by Dubai. Such a huge default and the media frenzy generated by it would shake Islamic banking to the core. Abu Dhabi, which regards itself as an exemplar of proper Muslim behaviour, would not like to be the agent of disaster.

Finally, ‘brand Dubai,’ the image of a glitzy, thrusting 21st century country, has been adopted, to some extent, by the UAE as a whole. ‘Brand Dubai,’ however tarnished by the slide in property prices in Dubai, remains an asset. Therefore, a crash landing by high-flying Dubai would harm the entire federation and undermine development. Abu Dhabi did not want to be responsible for destroying ‘brand Dubai,’ particularly since Abu Dhabi is exploiting it.

Abu Dhabi is likely to exact a price for ‘saving’ Dubai. Shaikh Khalifa could very well restrain the go-it-alone tendency of Shaikh Muhammad, the architect of Dubai’s boom and partial bust. Abu Dhabi may also seek to expand its interests in Emirates Airline, Dubai’s highly successful carrier, and DP World, Dubai’s port operating firm.
Abu Dhabi could even press for their conversion into UAE assets. Abu Dhabi could also compel independentminded Dubai to become fully integrated into the federation. This would deepen the stability of the federation, thereby improving the job prospects of the 5.5 million foreigners who make up 85 per cent of the population of the UAE.