George M. Mangion | Wednesday, 02 December 2009

Will Dubai falter?

George M. Mangion

The news concerning the Dubai debt repayment crisis as announced last Thursday, was certainly not unexpected but few predicted its impact on the world financial markets. Thus, it was not so surprising that the U.S. dollar edged up from 14-year lows against the yen as renewed risk aversion prompted investors to shed riskier assets.
As an immediate consequence of this announcement the world saw oil prices drop to near US$74 a barrel in Asia as investors curtailed their risky bets on commodities amid uncertainty over the extent of Dubai’s financial woes. Dubai’s debt problems, a hangover from a property boom that produced the world’s tallest building, have shaken trust among Western investors who only last year turned to the oil-exporting Gulf region for help during the global financial crisis.
We all know how most of Dubai’s debts, which have been exposed by the financial crisis, have grown through Dubai World, the State-run conglomerate has US$59 billion in liabilities, while its subsidiary Nakheel (a diversified property developer) carries a large proportion of Dubai’s total debt of US$80 billion.
The Dubai government, said it would request the delay in Dubai World’s debts, as well as those of its real estate arm Nakheel, which has a roughly US$3.5 billion Islamic bond due this month.
Dubai is ruled by the Al Maktoum family which in these circumstances, some investors lament that the line between personal property of rulers and Dubai “state ownership” is sometimes blurred. Quoting a top Dubai finance official, he says that the Emirate fully expected a fallout from its debt problems, however he immediately assured foreign creditors that Dubai World’s request to postpone payment on some of its US$60 billion in debt was “carefully planned.”
But “carefully planned” is not the kind of rock-solid assurance that was expected at a time when the Dubai property market fell by 50 per cent.
Still there were reassurances made by Sheik Ahmed bin Saeed Al-Maktoum, the Chairman of Dubai’s Supreme Fiscal Committee.
Last Wednesday’s announcement came about because the conglomerate wanted to delay repayment of a US$3.5 billion Sukuk bond due in mid-December.
Many questioned the fuss made out of the news on Dubai’s postponement of repayments. When one considers that the seven emirates are all backing each other, one cannot question this solidarity.
The Abu Dhabi pledge will be cashed if and when the crunch surfaced. Still commentators concede that Dubai is insecure irrespective of the fact that it is backed by the oil wealth of Abu Dhabi which has already stood up in the past to back its neighbouring emirate.
The announcement of the debt delay request appears to have overtaken investors in spite of assurances by the emirate’s ruler, Sheik Mohammed bin Rashid Al-Maktoum, who had continually dismissed concerns over the city-state’s liquidity.
Sheik Ahmed, who is also a member of Dubai’s ruling family and serves as the chairman of the Emirates world-renown airline, claims that the rumours that Dubai overreached itself during the good times, were unjustified.
Sheik Ahmed said the unprecedented growth over the past decade “helped lay the foundation for what is now a broad-based sustainable economy.
“Having said that, some are questioning the credibility of the region‘s trillion dollar market in so called Islamic bonds (Sukuk) that mirror Sharia law strict compliance rules.
These instruments can sometimes appear to be obscure and untested in their unique legal structure when compared to Western bonds.
Sharia law prohibits the payment of interest on debt. To circumvent this prohibition Islamic financial institutions have devised complex structures using techniques, such as sale-and-lease back solutions.
Typically one encounters some Sukuks linked to a string of defaults.
Dubai World advisers are still deciding whether the conglomerate should repay real estate developer Nakheel’s US$3.5 billion Islamic bond, or Sukuk when it matures this month.
Here, one can also mention the defaults arising from the Saad Group and Investment Dar.
In June, US$650 million of Islamic bonds issued by Saad Group, the investment company controlled by Maan al-Sanea, which owns a stake in HSBC, were downgraded to default status. Furthermore, Investment Dar, which owns half of Aston Martin, the British luxury car company, failed to make an interest payment in April on a US$100 million Sukuk issue.
Back to Malta, we all probed foreign news for assurances that our home grown Smart City project will be safe.
Hot on the heels to stem any adverse speculation came the assurance last week from Smart City Malta CEO Fareed Abdulrahman. He reiterated Tecom‘s full commitment to the SmartCity project. It appears that Tecom had the full support of its parent company Dubai Holdings.
In turn Dubai Holdings forms part of the triumvirate consisting of Dubai World and Investment Corporation of Dubai within the troubled emirate.
It is good to hear that SmartCity Dubai has once again renewed its commitment to the development of the stalled project in Kochi, India.
SmartCity Dubai, a subsidiary of TECOM Investments, has pledged its commitment to a plan to build a US$316m IT super-city in India (employing 90,000 jobs) after a local government official suggested the project had hit unsurmountable financial problems.
Kerala Chief Minister VS Achuthanandan claimed the developers of SmartCity Kochi faced financial problems, but the company’s CEO Fareed Abdulrahman was instantly reassuring.
Quoting Fareed he maintains that: “Despite the delays beyond our control in Kerala (India), Tecom would like to reaffirm its intention to complete this project successfully for the benefit of the people and economy of Kerala. Tecom also wish to highlight its commitment towards our legal obligations as outlined in the Framework Agreement for SmartCity Kochi.”
With hindsight we may recall how amid much fanfare in 2005, Tecom was chosen by the privatisation unit to take over 60 per cent of Maltacom our national telecom company.
It appears that part of the deal included the building of a US$300 million ICT project which aims to create 5,600 employees over an eight-year period. This was the bright feather in the Gonzi pre-election campaign slogan that has undoubtedly won critical votes for the party. Controversy erupted later on this year when Claudio Grech, then appointed as CEO of SmartCity together with other top officials had unceremoniously tendered their resignation.
Grech, who was the leading man in the negotiating team which secured the deal with Tecom on behalf of the Maltese government had stressed on: “diverging operating views,” and he quietly tendered his resignation last August amid speculation that the project had stalled just like in Kochi.
Since then to the relief of many who were doubting the project, the President George Abela led a successful business delegation to Dubai visiting Tecom. The President secured assurances from Group CEO Abdullatif Almulla that Tecom maintains its full commitment to the Malta project.
It is encouraging to read in the press that SmartCity Malta has become the first township property development to register for the Leadership in Energy and Environmental Design (LEED) Certification.
Further good news comes since the project is still on-stream albeit at a slower pace. It registered with the Green Building Certification Institute (GBCI), which handles the accreditation process on behalf of USGBC.
To conclude let us all hope that the transient financial troubles which are facing SmartCity’s promoters will be resolved in the coming weeks when the repayment of Nakheel (Sukuk) bonds will be honoured or possibly successfully rescheduled to the satisfaction of the bond owners.

The writer is a partner in PKF Malta, an audit and business advisory firm.



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02 December 2009


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