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December 2009

News Letter - 26th December 2009

After near record rain falls in the UAE last week (146mm in Al Aim – an inland city) and about 94mm falling in Dubai over a three day period, along with severe flooding in Jeddah (Saudi Arabia) Dubai got down to the business of attempting to sort out their debt. As predicted Abu Dhabi bailed out Dubai to the tune of $10Bn of which $4.1bn was used to pay a maturing Sukuk bond of Nakeel’s hours prior to defaulting on the repayment. The $10Bn from Abu Dhabi was in the form of a bond issued to the UAE central bank for a period of five years at 4% per annum. The bail out was predicted in our last news letter approx 24 hours prior the BBC announcement. A major cause of Dubai’s debt problem is said to be a mismatch in the maturities of many of the loans – i.e. too many maturing at or near the same time. However this ignores the fact that a ‘south sea bubble’ had been created and existed from 2006 until late 2008 – particularly in the property market!!

This still leaves approximately $22Bn of debt requiring immediate servicing – much by Dubai World – the quasi government owned group of businesses which include Nakeel, Limitless, Dry-Docks World and DP World. The majority of this debt is in the once greatly over-heated property market which has collapsed over the past 18 months. Creditors of this debt met on December 21st and are due to meet again in January to thrash out an agreement on Dubai’s request to reschedule this debt – probably a one-year or longer moratorium on repayments of capital.

Residential rents have already dropped by 40% to 50% with some experts expecting a further drop of 20% to 30%. Commercial rents have dropped by a similar amount and there is now a significant amount of vacant residential and commercial property available. Maybe it’s a good time to establish a business in Dubai – “experts” estimate it will be another ten years before rents are back to what they were prior to the commencement of this recession so it could result in very stable rents in the medium term: which is a good precursor for cash flow predictions in any business – apart from property!

In the mean time Dubai Electricity & Water Authority (DEWA) reacted to assure the market they will be able to pay their upcoming $3.2Bn instalment of their debt in full.

The uncertainty whether or not other Dubai Companies would be able to honour their debts has led to the Dubai stock market reacting nervously. Although it rose after the announcement of Nakeel’s payment of its Sukuk and positively to Emaar’s announcement of pulling out of a proposed merger with Dubai Properties, Sama Dubai and Tatweer Dubai the general market movement due to this uncertainty has been ‘southwards’.

Spending in 2010 by most Gulf countries is likely to continue at the present rate, mainly because of the significant recovery of the oil price throughout 2009: from a low of $32 a barrel a year ago to an average of around $70 a barrel throughout 2009.

The Copenhagen climate change meeting dragged on during most of this intervening period and essentially achieved nothing in the end. We appear to be like lemmings: threatening ourselves with mass suicide – although in our case due to human greed. As so often happens in such events the developed nations view us as the ‘punch bag’ for the rest of the world – in many cases rightly so. The indications from many reliable sources would indicate climate change is happening even more rapidly than first thought and maybe accelerating yet all we can do is “watch and fiddle while Rome burns”. As mentioned in the last newsletter Abu Dhabi has already built a city of zero waste and neutral CO2 emissions – maybe this is an example to the rest of the world of what can be done if there is a will (and money!)

This massive recession has had a serious effect on airline passenger traffic throughout the world with a drop in volume of over 3% in 2009. The only exception to this has been the Middle East. Despite Dubai’s financial problems a growth in air traffic of 10% has been achieved – the one bright star of the year!