The credit crunch and a 70% fall in oil prices has stepped up pressure on the oil rich Persian Gulf with the effective bailout of Dubai and its racehorse-owning, property developing Al Maktoum family last night.
The Central Bank of the United Arab Emirates bought half of a five year $US20 billion bond program by Dubai overnight.
Dubai will try and raise the rest locally over the next five years.
It will help Dubai meet massive debt repayments this year and continue to run a budget deficit to try and keep the stalled local economy out of a nasty recession that is looming.
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That should ease the pressure on Dubai which was starting to be treated like Iceland, Ukraine, Latvia and Ireland — just another global basket case heading towards possible default.
Local banks are hard-pressed to lend, even to the Government; real estate prices have fallen by 25% in five months according to some estimates; unemployment is soaring; expatriates are fleeing the place without paying debts (to stay and default results in jail) and some of the state’s major global businesses are struggling.
It follows a move by neighbouring Abu Dhabi to inject $US4.4 billion into five of its own banks. The UAE set up a $US13.6 billion fund last September to boost liquidity. In October it joined the global rush to guarantee bank deposits and promised another $US19 billion for the banking system.
“This program will secure the necessary funding for Dubai to meet its financial obligations and continue its development program,” the Dubai government said yesterday.
As well, Kuwait has rescued one of its major banks and injected around $US5 billion into the banking system there to boost liquidity and provide guarantees for commercial and investment banking deposits and loans.
The UAE is aiding Dubai and Abu Dhabi via its huge $US330 billion sovereign fund, the world’s largest. It has also bailed out two of Dubai’s biggest mortgage companies.
The UAE Government is based in Abu Dhabi. Dubai is oil and gas poor (others in the UAE are richer in hydrocarbons), but in the last six years it has charged headlong down the development road with huge property plays, such as man-made islands, the world’s tallest building, an airline in Emirates, and a determined chase for financial services and tourism.
According to reports from ratings agencies like Moody’s, Dubai borrowed $80 billion from around the world to finance this ambitious rush to modernise. Moody’s said last week that Dubai could have to repay $US15 billion of that figure this year, hence its need for cash.
It has seen the development of the world’s third largest biggest ports operator in DP World, which controls the old P&O port business in Australia.
The Nakheel property development company is a shareholder with Mirvac in Australia and a partner in their bid for a rich Government property development on Sydney Harbour. Nakheel has cut back on much of its real estate spending and development work, including the Trump Tower that was being built at a cost of $US650 million by a group that included Leighton).
Nakheel is run by Chris O’Donnell, a former Sydney property company executive.
The Al Maktoum family has extensive racing interests in the UK, Ireland, the US and Australia where they bought out the breeding and racing business of the Ingham family last year for a reported half billion dollars or more.
Leighton Holdings is a major investor and contractor in the UAE with 45% of the Al Habtoor Leighton Group which has billions of dollars of construction contracts in and around the Gulf.
Bloomberg reported that real estate prices have fallen 25% in Dubai from September’s peak and 20% in Abu Dhabi. The fall has been driven as much by the 70% plunge in world oil prices since last July as the onset of the financial crunch and now global recession.