The Orlando Tragedy and American Politics.

At the outset let me state emphatically that I am against ALL forms of violence and any loss of life under any circumstances is a deplorable act. The tragic events in Orlando where 49 people senselessly lost their lives to a deranged man who attacked a night club armed with guns and the intent to take lives. The tragedy speaks for itself in overtones of grief that cannot be cured by words alone. In the same breath the shooting has been become a political tool for both Republicans and Democrats camps and centres around two crucial issues; the role of radical Muslim militants in this shooting and the issue of gun control.

In essence there is no difference between this attack, in its intent and ferocity, from other attacks in schools and public places all over the United States. What makes this a political issue is that the attacker was a Muslim and purported to call 911 during the attack and pledge his support for ISIS. In sincerity the attacker does not fit the profile of a Muslim radical; yes at times he attended prayers at the local mosque and claimed he had friends in ISIS and in Hezbollah, (which is very unlikely as both those organisations are sworn enemies). What is more likely is that this deranged man had an issue with gay people and exacted his anger by killing people. He was not someone fired up with ISIS ideology looking to carry out their promised attacks on America. In essence his actions in acquiring guns and entering a public place and randomly shot people no different from the actions of the shooters in the cases of Sandy Hook Elementary School and Columbine High school.

Since Jan 1, 2015 there have been 27 school shooting, (SCHOOL not public shooting) in the US, in which 23 people were killed and 52 people were seriously wounded. It may be pointed out that not one of these 27 shootings was carried out by a Muslim attacker or by a recent immigrant. In most of the cases the shooters had either easy access to guns or had no problems in acquiring the guns, and one can say that none of the shootings were politically motivated. No one has come and claimed that there is some form of Christian radical movement behind the killings only because the attackers in each case was a Christian. The fact that Omar Mateen who was the killer in Orlando was a Muslim does not make the act more radical other than giving ammunition to people to play the Muslim terrorism card. There is just as much a chance of a fundamentalist Christian angry about gay rights to carry out such an attack as it was for Omar Mateen to carry out this attack.

Using a paint brush to call all Muslims radical and to assume every immigrant to the US comes with the intent to carry out attack is ludicrous. From an international perspective lets get something very clear, that radical Muslims are attacking more Muslims around the world than targeting Americans. Yes there have been some attacks by them in Europe and the West, but these are minuscule attacks compared to what is happening in Syria, Yemen, Lebanon and Pakistan just to name a few countries.

Now onto the issue of gun control; why would a man want to buy an semi automatic high powered rifle to shoot rabbits? Why are these guns so freely available to the average man in America? Can we assume a proper sense of responsibility about using guns on the part of each owner? If this was the case then how come we have thousands of gun deaths in the US each year. Simply put the guns need to be controlled and ideally should only be in the hands of the law enforcement people and hunting guns should be better defined and better controlled. Yes a radical or deranged man will still try and get illegal guns but then the access will be more difficult.

I live in the UAE, we do not have guns in the hands of people. We have Muslims, Christians, Hindus and people of other beliefs living here, to the extent that one can argue the non Muslims are over 50% of the population. We have not had one public shooting, not one school shooting, not one attack based on religious hate and to the extent that any religious or ethnic hate talk is immediately dealt with by the law.

On haircuts and debt settlements.

There has been recent talk, some of it unsubstantiated press rumors, that Dubai World, the debt laden Government Related Entity of Dubai, has been contemplating, on the advice of its consultants, to consider as much as a 40% haircut on the debt and repayment of the balance over seven years with no interest. Needless to say, banks had two reactions ignore the rumor, (hard to do in the present day) or just balk as the audacity of the whole idea. Haircuts and debt repayments only happen to work, if that is the word to use, when there is literally no hope for any possibility of the principal debt ever being repaid. If the rumor was an attempt to test the waters, then the consultants need a fair dose of understanding that you hold a dialogue with the banks and do not pretend to have a conversation through the rumor mill, this always backfires.

While I am not privy to the discussions or indeed the people who are making these decisions, so what I venture our is conjecture and my recommendations may well be off the mark; yet as a three decade resident in the financial world of UAE, and an ardent well wisher for the country I would imagine a solution oriented approach is what is needed. What are the options ahead for this debt settlement?

In the first place we must be clear that the entire extent and complexity of the Dubai World debt is not entirely public and in similar vein neither is the possible cash flow profile over the next few years really known to the general public. Thus, if a seven or five year repayment is suggested it goes without saying that the cash flow projections will have to match this settlement profile. Keeping this in mind I would suggest the following.


1. When considering a haircut of any amount there has to be a clear understanding that this is seriously hurt the image and the standing of not only Dubai but also UAE within the financial community. Even if such an offer is accepted it will be with the gesture and lack of goodwill to provide additional funding in the future even when things are better. Bankers have a long memory and will remind you of their losses from decades back. Any haircut that is suggested has to be tied to an incentive. My suggestion would be to offer the banks a 70% settlement with the balance 30% to be strucurted as a Zero coupon bond with a long maturity and the caveat that this 30% would be exempted from payment under a formula for early payments. Thus if the 70% is to be paid say in seven years then for each year this amount is paid earlier there is a percentage of the 30% zero coupon bond that is written off. This creates an incentive for DW to pay early to get the discount. Ofcourse, the 70% should carry a new negotiated interest rate.

2. While legally there is the possibility of a bankruptcy to be considered and a financial 'guru' even said to me that there is no harm in such a route being explored and mentioned the examples of Enron, Japan Air Lines and many others. My simple response is that those were not GRE's and were joint stock companies with a broad public shareholding, DW's default will in the end be seen as a moral default of the entities behind it and this is not an option that should be even discussed.


Then the smart one's will ask are we not in a catch 22 situation?

In a sense yes, but then we have to consider long term solutions. Here is what I would do.


1. Within the UAE finance structure the Dubai Government should consider a long term Treasury Bond issuance program. These bonds should not only be seen as a monetary measure to deal with the deficit but also to restructure the debt of the GRE's in a manner similar to what many governments around the world do. US Treasuries are issued all the time and new issues retire old bonds and the cycle goes on under a long term program. It is precisely the lack of this program that has resulted in the funding of long term project needs with short term borrowing resulting in this mess.

2. The current Federal and Abu Dhabi Government assistance should also be rolled into this Treasury Bond program and perhaps even seek a tier one issuance with the Federal Government or Abu Dhabi government subscription of the earlier issues. This will bring much needed liquidity into the trading of these Treasury Bonds.

3. The UAE Central Bank to support such a program in the classification of these as investment securities rather than as simply loans to Dubai Government.

4. Set out the assessment of the cash flows of Dubai World and seek an debt retirement program which is realistic and not based upon the hope of things improving. It will mean that more detailed information on the cash flow and asset profile of the company and then to see how this can be managed to meet the obligations. With the backdrop of a Treasury Bond program the pressure to come up with three, five or seven year debt repayments will be overcome as the Treasury Bonds, through their liquidity and re-issuance programs will be able to manage a more orderly debt retirement rather than a pressured situation as we sit in today.


The reality is that any settlement of this debt has to be realistic in its scope and intent; failure to recognize the sensitivity of the situation within the financial world would have repercussions that might be hard to deal with. It is therefore vital that for the good the country's standing a positive approach is important in this situation. I am not convinced that haircuts and interest waivers is the solution, this is not giving the right message.

Is Dubai Inc's debt really $170 billion?

The EFG Hermes report that suggested that Dubai Inc, implying all government related enterprises (GRE) and direct government debt could add up to between US$ 130-170 billion opens up a discussion in ones mind. The report suggests that the current known debt of $96.6 billion could be higher on account of the bilateral loans with local banks. It even cites the possibility that EmiratesNBD bank might have an exposure of $24 billion to Dubai Inc. This prompted me to check the balance sheet of the bank and to glean through the information known in the market and reported from time to time. The related party exposure shown at end of September 2009 in the balance sheet shows DH 45 billion (not dollars) due from possibly Dubai Inc as a whole, and there are deposits etc of about Dh 7 billion. I cannot therefore understand how such an assertion can me made. The entire loan book of the bank is US$ 53 billion of which just retail lending is $ 6.56 billion and then there is the trade finance and corporate lending, which when is adjusted to the over all loan book, by reason of deduction can only end up with the Dubai Inc exposure as $12 billion or so.


In addition, the local banks also have have massive deposits from the government entities and this is a major part of their float that comes to them and is a key part of the interest margin that they earn.

At the time of the Dubai World announcement in November 2009 the total debt estimated, which includes obligations to suppliers and contractors, was around $82 billion. Yes new obligations were taken with the Central Bank and the recent Abu Dhabi assistance which would not, in theory change the position of the over all obligation. Assume that of the $25 billion raised from the Central Bank and the Abu Dhabi assistance, about 75% was used to retire debt and the balance kept in reserve for operations or other maturing obligations, then even the net effect would be that the obligations would go up to US$88 billion.

How this can suddenly be considered a having increased to US$130-170 billion is baffling to me. I have always assessed that of the $82 billion about $60 billion is bank loans or bonds issued in the market and the balance $ 22 billion is creditors like consultants, contractors and service providers. A number of these creditors had either agreed or willing to agree to a reduction in their amounts in exchange for a definite payment plan.

I can buy the argument that if all the grandiose plans that were underway in Dubai were to continue at the same pace as they were in the early part of 2008 then indeed one can argue that the debt obligations of Dubai Inc would have mushroomed. Whether they would have been to the extent of $130-170 billion is a moot question. Intersestingly a couple of weeks back EFG Hermes published a report on the UAE banks and had made not any mention of the assertion that is being made today! So what information has come to light that would prompt this sort of assessment?

I am not suggesting that the research analysts at this reputable bank are being malicious but I do feel, very strongly, that issuing blase' statements is not conducive to the functions of a research analyst. After all we are not talking of an increase of say 10% which can be said to have happened in the normal course of business. In effect the suggestion is that the exposure to Dubai Inc is well over 120% more than was known to them or the market a few weeks back. This is where I think there are two options when I read such reports, a. press the delete button, or b. apply some common sense (which could be uncommon these days) and see is there any logic to this sort of thinking.

Clearly I took the second course. However, this asserts my position a few weeks back that it is time that a white paper is issued by Dubai Inc on the debts, the assets and that will clear up the air. This has, willy nilly, become a public matter through the way such reports have emerged in the media. This therefore needs a clear and coherent response from the right circles. I agree that bloggers like me can only speculate on the matter at hand, but we can use logic.

In a nutshell I find the nature of this report on the debt from EFG Hermes to be speculative in nature and I do believe that they owe it to the audience to explain themselves. Simply to assert that this could well be on account of bilateral loans from the banks which might not be reported is a rather serious accusation. I would presume the UAE Central Bank and the Auditors of the banks, all of whom are well reputed professionals, could hardly have sat by quietly eating their homous oblivious to any new lending spree in to Dubai Inc. I am in the consulting business and know for sure that new debt of Dubai Inc or most even well known companies is not on offer these days. Banks have hunkered down and just preserving themselves for the moment (not necessarily the best strategy in my opinion) but nevertheless that is how it is.


Ofcourse when the year end balance sheets come out in a few weeks time we will know for sure what the final verdict is. Till then I will reserve judgment and simply say that this report needs validation, and EFG Hermes may have got this one wrong.

Burj Dubai: Symbol of Vision

On Jan 4, 2010, the main Sh Zayed Road, alongside which the Burj Dubai is situated, will, from late afternoon, witness a bumper to bumper traffic jam as people will rubber neck to see the 800 meter tower be unveiled to a world that held its disbelief for some six years. While the events of 2009, especially the last quarter, may have dampened the spirit of inaugurations, there is going to be no holding back as the ceremony marking its opening will commence. In the area around the tower those fortunate enough to be invited to the event will leave just about as much space as a taxi packed with hippopotamus will allow. Emmar Properties, the owners of this symbol of modernism will carry the pride of their work, hopefully also acknowledging the hard work of thousands of laborers who toiled to make this dream happen.

Yet, more than the adroit steadfastness of Mohammed al Abbar, who heads Emaar, the vision of Sh Mohammed bin Rashid al Maktoum, the Ruler of Dubai and Prime Minister of UAE, will be showcased. Indeed that vision may have been scaled back by the setbacks of Dubai World, but there will be rejoicing that Emaar did the impossible, not only for the vision of Dubai but for the UAE. At the same time the media is ofcourse looking at the future of the economics of such a grandiose tower. Admittedly such iconic buildings are not built to make money by the truck load, but more to act a beacons of progress and development. Indeed the Empire State Building took 19 years before it became profitable, and indeed did other such iconic towers take longer to break even. These buildings were built to become symbols of attraction and this is what Burj Dubai would also be for some years before it turns to be entirely profitable.

However, it remains to be seen if the cheer of such a launch will rub off onto the the depressed real estate market within the country. I am perhaps the optimist who refuses to see the glass empty, but there is no merit in the argument that there is an over supply looming in the horizon. While domestic population in Dubai may shrink by as much as 10% over the next two years, we should not forget that this shrinkage happens at the lower end of the job scales. While indeed 40,000 additional units on the market will create over supply conditions I do not see anything wrong with this as its time that greedy landlords also appreciate that an oversupply does mean that the rents will come down. This means the cost of doing business will indeed come down too. I also believe financial constraints, project delays and the general uncertainty in the market will mean that these 40,000 units will be phased into the market at a slower pace. People are worried that only 70% of the new units will be leased out, but then this is fine, as it allows a better balance to the market where leasing rates went out of control.

When the search lights and strobes will unveil the tower we will also notice the contrasting styles of Nakheel and Emaar. While the Burj Dubai will remain the icon in Emaar's cap, it has to also be credited as the one developer in the UAE who has actually delivered. The main feather in Mr. Abbar's cap will be that Emaar has delivered more completed real estate in the country than anyone else, and indeed this is something that they should to proud off. Yes some may argue that it may have over extended itself but we must acknowledge that it was no mean feat to build a 800 meter tall tower and the many other projects it completed. The question now will remain whether this alone will act as a watershed to commence the recovery of the real estate market?

While the financial press will do its utmost to spoil the party with the oft repeated remarks about the looming $22 billion debt of Dubai World, my own sense is that now a restructuring is pretty much on the cards. The twin effect of the Burj Dubai being open and the debt restructuring being completed will be positive and reinforcing. There will be differing views on whether the extravagance of having the world's largest tower was a necessity or not. This is now irrelevant as the concept of Burj Dubai was at a time when all things big were being considered and somehow the necessity to be in the Guinness Book of Records was paramount. Soon after the Burj Dubai was announced Nakheel, Dubai World's subsidiary, decided they needed a tower even higher, not to mention there were some private developers who secretly also craved the same idea. If nothing else the recent slowdown and the problems that have come with it have dampened those spirits with good reason.

The vision of equally tall towers popping up on the Dubai landscape will now be into the future and perhaps a very distant future. I personally hope that this will be considered the last of the 'tall ones' as other than satisfy ego and to be an icon there is no immediate need for another 800 meter tower. Dubai already has a few architectural icons and there is indeed no need to more to that list. Someone asked me about the vision for Dubai that was unveiled from 2003 and then refined at times is still intact or not?

The idea of being the entertainment capital for the region and the metropolis that competed with the best of the world is perhaps never wrong to conceive. I suspect the grand scale that was planned was being implemented too rapidly. Yes projects like Dubailand, Al Bawadi (a few kilometer strip of hotels) and the grand plans of Nakheel are either slowed down or perhaps will need to be chopped up. The exuberance of development was such that some ideas were just not financially practical but were being touted around with the glee of a child in a candy shop. Underwater hotels, revolving towers (one in which each floor revolved), designer labeled towers, theme parks that could perhaps attract a handful of people being compared to the likes of Disney all were welcomed in the enthusiasm of creating something new and something on a scale bigger than life. Anyone who questioned the economic viability of the ideas or the pace at which all this was happening remained the unheard voice. Projects like theme parks and massive residential complexes will be on the back burner for some years to come and this is a good thing. First the fundamentals have to be restored, the idea of the grand has to be replaced with the practical and as the financial system adjusts to the new realities it will also bring a more durable strength to the system.

Does this mean the vision of Dubai will not happen?

I would rather say it will not happen in the three to four year period but more as a part of perhaps a 20 year plan. There is nothing wrong with this dose of realism. I remember in the early 1990's and soon after the first Gulf War, Sh Zayed road was popping up as the new development area. A prominent businessman from Abu Dhabi decided he will be build the Holiday Inn Crown Plaza and everyone wondered what was going through his mind. As others followed suit and buildings started to come up analysts questioned whether there was a viable future for these buildings on Sh Zayed road. Yes it all seemed before its time and today too one can say some of the projects were before their time and some perhaps a decade too early. I believe the vision was not wrong at all, but the speed of trying to realize it all created pressures that were just too hard to handle, especially when the global downturn happened.

In this sense the opening of the Burj Dubai will mark the end of an decade of exuberance and show that the new decade must now be one of repair and consolidation. Yet in the landscape of the country the landmark will become, like the Burj Al Arab was for over a decade, a symbol not only of pride, but identification with an element of success that will be seen with either envy or admiration.

Banking Report: Analyzed

The EFG Hermes report on some of the banks is interesting by all means, while not aimed at a credit assessment but more at stock performance, it nevertheless presents a balanced view. While there are some notable exceptions in the report I have seen, like Mashreq and Union National Bank (my former bank), it does make the point that the current financial woes are not as bad as they sound. The 3rd quarter performance of the banks was better than expected and judging by the analysis the banks that appear as laggards in their analysis are not on account of credit issues but more management style and focus in terms of the economic segmentation they pursue for earnings. While I am a traditionalist who would not rely on inter bank borrowing to fund the loan book, I concede in the ten years I have been out of managing a bank a great deal has changed. While back in the 1990's international banks panicked at the slightest political trouble in the region, the trend since then has been more mature and banks do not cut lines at the slightest of whims as they used to back then. Thus inter bank funding is more stable and can be seen as a factor in funding the loan books of banks, even though I was surprised that some banks from the sub continent got over cautious through the recent Dubai World crisis and while not cutting exposures to the country did have a 'wait and see' policy.

Indeed it was interesting that their analysis of the Dubai Inc (a loose word to describe all the debt of Dubai Government and the GRI's) is spot on in mentioning that while the numbers seem significant, even to GDP, there are two aspects that need consideration, a) the surplus cash flow of the good companies can be used through the parent structure mechanisms to help the weaker ones. and b) there are a number of assets that are eventually available for a sell off or privatization, (though they don't make these two points-that is how I read it). The current restructuring is a major element of this conundrum that needs to be solved and for this I would urge the Dubai World and the government to set a much faster pace to come to a settlement with the banks on this issue.

While the financial press have made a big deal, even today, about the support that has come from Abu Dhabi and hinted about it not being available in all circumstances (see today's FT) they forget that no support can be a carte blanche and has to be discussed on the merits. Interestingly yesterday an Abu Dhabi official spoke to Moody's Investors, as they have reported, and discussed that they have more than twice the reserves of the whole UAE public sector debt (assuming even the GRI's) in just one entity, to which if you add the Central Bank reserves and the other assets held by UAE entities the situation is more than comfortable. This is where I get so frustrated with reporters than they miss the big picture. Abu Dhabi thinks of the country as a whole, and eventually will be there to stitch things up, perhaps at a cost but it will be done.

The analysis of the banks in each of the cases is interesting. It is heartening to note that banks like EmiratesNBD and National Bank of Abu Dhabi still figure out as the strongest and the impact of either one of them of the current situation is minuscule. EmiratesNBD with a captial adequacy of near 20% and a provision of 95.5% of loans actually stands out better than Moody's would have us believe just two weeks back. None of the banks in terms of their capital adequacy numbers or coverage for non performing loans seem to be a problem. It is highly likely that into the mid of 2010 we may find over provisions on most of the balance sheets, which I strongly advise the bankers not to move back into profits. This will offset some of the need for higher provisioning on the general commercial and personal lending portoflios that may have suffered through the slow down.

In the end the macro economic scenario will play an important part. Higher liquidity, small to medium sector finance availability, and better respositioning of the asset-liability mismatch, which plagues all banks in the region, will ensure a stable to better year ahead. Significant in this process will be the following factors:

a. Better GDP performance.
b. Stability on the issue of the debt restructuring.
c. Middle market performance being better, i.e. trading, retail and services.
d. A steady real estate market, which while overburdened with supply will still gradually get over the panic stage.
e. A greater awareness of UAE position as a regional hub for business.

While I am not predicting major new avenues of business income for the banks in the year ahead, i.e. IPOs etc, I do feel that they will protect their market share better, hoping a better corporate and government sector performance will offset a weaker personal debt performance in the year ahead. Banks who manage to address the asset-liability mismatch early into the year will find themselves lighter on their feet and more nimble to take advantage of a recovery.

In terms of safety of the banking system I have the least of worries. No Bank incorporated within the UAE has ever been allowed to go under. (BCCI was not UAE incorporated and interestingly according the Sept 2009 Liquidators report of that failed bank 81% of all creditors have been paid, which must be some sort of a record as normally failed banks struggle to pay off 40-50%). I am positive of this that the UAE cannot and will not let a bank fail, to which is added a better regime of regulatory control and a more mature management in most banks.

How do I see the year ahead for the banks? In a nutshell: stable to better performance, dealing with the recent past bringing cheer with each successful settlement or restructuring and in terms of safety pretty much at the top of the definition of 'prime quality'.

What happens Next: Part B

Just about the time I had posted the last blog, I read about a prominent World Bank official speak about Dubai and the future. Indeed I endorse the views of the learned World Bank official, especially on a number of issues. Most importantly the feeling that the debts that are maturing in the year ahead will be met and it would add that it is unlikely that the fiasco that was caused by abrupt announcements will happen again; all the more because lenders and the borrowers are in discussions.

However, some underlying anomalies within the economic system need to be corrected, and while this may take time, the building blocks needs to be put in place surely soon. One of these basic steps is to consider these measures, obviously in more detail than a blog can narrate, and then take a concerted view on the matters. I do feel that the economy has, since 2001 become highly skewed in two directions:

a. The private sector contribution to the GDP being an abysmal 13% imply that either government or government related entities were fueling the pace of the GDP growth. The result was that sectors like Hospitality (Jumeriah Group), and Real Estate (Nakheel, Emmar, Dubai Properties and others) were the dominant players and hence in a sense creating a huge concentration of rapid growth in the semi public sector or public sector hands. While as an impetus to start things off this is not a bad idea at all, but at some stage the diversification of this process into private hands through IPO's should have been considered.

b. The development cycle was being fueled by a high debt level, as most of the real estate developments involved infrastructure build out and the pace of planning outstripped the resources needed, resulting in a scramble for debt to fuel the engine. This was at no time seen in a broader perspective perhaps even considering inviting the private sector into a utility model to build the infrastructure, as is done in a number of countries.

This propensity of concentration in the sectors mentioned and the leveraging of the debt has to go through a process of de-leveraging and privatization. Ofcourse both these avenues pose some unique problems.

De-leveraging can only work with liquidity and appetite available for restructuring the loan profiles of the current debt, and this seems to be under way. However, privatization in the current market has to be put on the back burner. I personally think that this is somethign that should be given thought to.

Here is what I would do.

Announce soon after the debt resconstruction that the privatization is an option and to float mezzenine funds to take equity positions in some of the assets with a clear idea that within say 24 months the privatization will occur. This wll give the market the confidence that is needed, redress the private sector contribution to the GDP and most importantly decouple the existing situation. Yes it sounds simple, but it is actually something that needs planning and can be done selectively. eventually the government or GRE's can own about 30-40% of the entties and sell off the rest. I suspect the cash flow from these would be ample to redress the existing situation.

I believe some assets are perfect for this strategy, i.e. the hospitality sector, while others may have to be repaired and their timing of privatization may well be in the end of 2 years from now. But the intent itself, if made public, brings about the interest in the private sector, demonstrates a will to take structural measures to fix things and most of all shows the world the way out of the situation.

2010: What happens next?

After the turbulence of 2009, human nature expects the new year to be one of positive difference. If 2008's ending weeks were tinged with the hope that the GCC economies would survive unscathed 2009 proved them wrong, as the Al Gosaibi debt issue, the Dubai World surprise and the general battering of UAE credit ratings by rating agencies brings 2009 final days with a gloom that focuses ofcourse on the hope all will be well. Yes I have mentioned the silver linings that accrue in this over cast moment of the regions financial landscape. While we can all hope for the best, there has to be a concerted effort to put into place the elements the will change the financial topography for the region. This does imply what are the likely events or processes that will change the economic outlook.

Here is a mind map of what perhaps will happen.


1. The Dubai World Debt.

Indeed this has been and will be the prime issue that the financial and media world will focus upon. It is crucial to the well being of the economic system for the region, and most importantly, it is where the confidence of the financial community can be best restored. I believe it is important that the banks and lenders agree to the restructuring of the Dubai World debt, whether through their negotiations with the company or through some prodding from the government, both Dubai and the Federal government. Indeed, Abu Dhabi assistance is already implicitly tied to the lenders agreeing to a restructuring and thus I do feel bankers and lenders will not be so short sighted as to scuttle a settlement merely to get brownie points. I believe there might be a few hiccups but in the end the settlement will be hammered out and a restructured debt will provide the breathing space to improve the repayment capacity down the road. I believe also that a successful deal with the lenders will allow either Abu Dhabi, Dubai government or the Federal Government, or a combination of them all, to be more forthcoming about their plans in a restructured environment.

2. Oil Prices.

The current bet is that an oil price hike would slow down the recovery in the US and Europe and hence derail any recovery that we have seen thus far. My own opinion is that a better economic performance from India and China will bring in a higher demand for oil, and a gradual up tick in the US and European economy will also add to the demand side of oil. I foresee a $15 increase, on average, for the price of oil in 2010, with a possibility in the summer for even a higher spike based of inventory management and constraints in stockpiles. Added there could be tensions between Iran and the West that could well add to the upward pressure on oil prices. The political dimension to oil prices is hard to follow and while most predict Iraqi oil production improvement could well keep a lid on oil prices, my own feeling is that we are a bit complacent about oil prices and it could well be a benefit for the region adding to the reserve pools of the sovereign wealth funds.

3. Increased Government spending.

I do believe Saudi Arabia, UAE and Qatar within the GCC, and Iraq and even Iran, outside the GCC, will be investing more into infrastructure, health and education. The first two countries have already announced major plans for power, railway and roads and health care upgrades. These are massive investments which will become the base of economic recovery for the region. Though it may well be that the fruits of these spending programs may not show up immediately there is no denying that it will set the stage for the decade. UAE's announced investment into nuclear based power generation already promises to benefit the region and indeed the US and European suppliers of technology.

4. Revenue Leaders.

If property was the revenue leader for the region in the past decade it is clear that new revenue leaders will emerge. I feel the service industry and the trading sector will come back into the limelight, with tourism becoming a new major revenue earner for the region. The model of an enabling economy in the UAE, through which the service and trading sector can thrive has been a tried and tested model and all we have to see is the return to those values as the prime drivers of the economy. In addition the attention that has been put into creating tourism as a destination driver for UAE there is the promise that this could well be the new bright star for economic performance. Countries like Oman who have a very rich tourist content will also begin to play this card more effectively, resulting in a broad based attraction for the region. I also feel in some ways manufacturing will become more important as more electric power is available in the years ahead, allowing the strategic advantages of the region coming into play.

5. Financial Performance.

I do believe banks will continue to be burdened in their performance through the effects of the past two years. There is alot of clean out of these balance sheets and that may well be the focus for the years ahead. I know that banks are in better shape than our rating agencies would like us to believe, but their focus on asset management will be more crucial then trying to get run away performance numbers each year. I also believe banks will have to change the way they compensate their senior staff as some bonus schemes only implied that the more risk they took the higher their bonus. I do however feel that the stock markets will do better than they have recently and while the maturity of these stock markets is still doubtful with true depth and two way liquidity still down the road attention towards superior performance compared to other markets is on the cards.


I do feel in addition some important steps need to be taken for the year ahead. Paramount to this would be the setting up of a 'think-tank', perhaps sponsored by the banks, to bring in the mind power to frankly and openly discuss the issues that face the economy. I also believe that people within the UAE government also recognize that there are many here, both Emirati and expatriates, who may not agree with some of the ways things are handled, but their sincerity and care for the country should not be questioned. I believe a broader base of discussion is what will improve the understanding.

Yet we have to understand that there will always be the cynics, like some of my banker friends who call me to tell me how bleak things are, and there will be the over enthusiastic admirers who will pretend there was no problem. Perhaps the truth is squarely in the middle, and this is perhaps why I ask for balance, not hysteria, for understanding rather than idiocy, for patience rather than panic, and most of all, when in doubt 'ask' do not 'guess'.

My single line call for 2010: 'Will be an anxious year, with more reasons to cheer than weep."

The Dubai World debt puzzle.

I get accused these days of being a Dubai 'fan', all the more strange since I hope I have been pragmatic in my advice to both sides. Yes there is not denying that I do love the UAE, it has a great deal what is good and when it has needed improvement I have spoken out, not as a cynic but as a friend who means well. I have been a banker for a major part of my life, and have viewed banking and bankers from a close distance this past ten years.

As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.

Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.

But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.

My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.

I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.

This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.

UAE Bashing- time to stop it.

Since the last week of November 2009, and after Dubai's surprise, but badly handled announcement about Dubai World, it almost became a fashion to indulge in some Dubai Bashing. So much so that the rating agencies, for whom I have scant respect, jumped in and turned the Dubai bashing sentiment into an all out assault on the UAE. Pundits who just a year ago were queuing up for invites to the latest launch of a real estate project were suddenly become experts on who felt they have to join in the assault. I am not suggesting a conspiracy theory in the media, but simply pointing out that it seems its fashionable to run down UAE and Dubai because that is what sells newspapers. I fully admit that there are problems and yes there is a need for transparency and accountability of the situation and a great deal needs to be done to bring back confidence to the system.

However, it is deeply irritating that when the good news has come out, the bond that was the subject of such concern has been paid, and most importantly Abu Dhabi and Dubai have shown that there is a supremacy of the Federal system, resulting in the $10 billion assistance from Abu Dhabi to Dubai, all this good news is not being presented in the right light. A senior correspondent of a class A European newspaper asked me, in a rather sinister way, as to what was the price Dubai will pay for this assistance. Even though whether the assistance is a loan, or indeed an asset purchase, frankly who cares? The bottom line is a crisis has been averted, and some measure of confidence has come back to the market place.

Rating agencies have found more reasons than one to continue to make it sound like a contagion. I wonder what did they know that was new now compared to a year ago? Did they not know of the debts of Dubai World? Had they not in their review process and due dilegence with banks, when granting the ratings, discussed these issues? So they say the standstill suddenly brought home the vulnerability of the situation; it highlights how weak their research was in the first place.

It is time to look ahead now. I know that the financial system has been tested in this crisis, and more importantly the country's political will as one nation has been tested and this came through with flying colors. I have been resident here for close to 30 years, and have often spoken out about matters that have needed improvement. I have not been candid and blunt because `I am not some journalist who might want sensationalism to promote my name, but someone who really believes that in the past 38 years UAE has grown to be a fabulous place to live and work. Its a safe place, with a great infrastructure and people who have been more welcoming then others. Yes there are tons of issues that need to be resolved and this is where the focus must shift.

I was asked what was the lesson learned from this crisis.

I would say if there is one thing that is not need is a system of governance, at the Federal level, whereby debts of each of the emirates and their GRI's can be monitored. I was taken aback that Dubai World, on its own was allowed to pile on such a colossal debt, much larger than Dubai's own debt. I believe that this situation should never be allowed to happen again. I am not concerned with the politics of the situation, it is in a sense, a risk even a rich nation like UAE cannot afford to take. Indeed this crisis will pass, and I say this with knowledge and confidence that there will be support from all quarters within the country to resolve the problems of Dubai World, and there will be a clear process to ensure it never happens again.

Lenders must also be made to realize that they have to carry part of the pain in this. I asked a well known journalist who has been writing about this matter every day as to why hasn't the carelessness of the bankers been questioned in this lending? I never saw one hard hitting piece on this subject, it was almost as if only the borrower was being blamed for the excesses. I believe that while the new arrangements for Dubai World have, in the longer term created the means for the repayment of the debts to take place, there is a need for bankers and bond holders to also agree to a restructured debt. This is the pain of lending and it is time that all parties understand this comes with the territory.

The Night of the Rating Agencies

The rating agencies have in rapid succession changed their position of Dubai and UAE entities, almost like in famous night of the generals from World War II, where former darlings fell from grace.. Suddenly the very story they were selling so well a year ago is being shot down by them in their supposed zest for 'caution'. In what clearly seems a case of jittery nerves Moody's has down graded three UAE based banks citing the over all financial situation over the Dubai World debt to be the reason for caution. Interestingly they say this when on November 29th, 2009, yes just about 10 days back, they said that UAE Banks rating were on review and then do not explain the reasons for the downgrade other than some prosaic general statements. I know a Moody's spokesperson will say yes the result of this review is the downgrade yesterday of EmiratesNBD, Dubai Islamic Bank and Mashraq Bank.

To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see http://zerohedge.blogspot.com/2009/07/calpers-lawsuit-against-rating-agencies.html where transcripts of the actually filed complaint appear.

Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.

Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.

Here is how is see why the panic is not being seen in balance.

1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.

I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.

I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?

Moody's Cheap Shot.

During my banking days I often met with rating agencies and always found them to be a rather pompous lot who 'researched' alot and often were judgmental to the point of sounding like pontificating pundits. They performed an important task for the financial markets and while generally did a decent job, but once in a while they messed up in royal style. Moody's downgrade of Dubai Electricity and Water Authority (DEWA) is based on Dubai government's "recent decision to explicitly segregate its direct obligations from those of its GRIs, following which a decision was subsequently made to pursue a debt restructuring for Dubai World'.

Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.

Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.

Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.

The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'

I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.

My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.

dubai and the press

Currently the financial press is littered with stories about Dubai and its current woes. In the plethora of articles from Hong Kong, to India, and the West, soothsayers are predicting the end of Dubai's glory days. Indeed the botched public relations attempt by Dubai was not only lacking elegance but also spat into the face of the financial community almost demanding a 'standstill'. Yet we live in a sad world where in moments such as these analysis that is objective are drowned in the moment of sensationalism. I am not suggesting that the urgent $26 billion debt restructuring of Dubai's world is a mirage, but I do feel that understanding defaults and quasi government debt is a little more complex then just being hyped up about it all.

But lets see the context. It is not as if Dubai is the only economy that is having to respell the word debt in one hundred different ways. Companies, public sector enterprises and indeed governments all restructure debt, sometimes by issuing new debt at other times by negotiating new terms on existing debt. So why be so surprised that Dubai has asked for some concessions and understanding? Yes admittedly it has done it with a blend of arrogance and naivety but lets move on from that and concentrate on the issues at hand. Are debt holders of Dubai World so sure that enforcement of claims will give them a better reward then cajoling the shareholder of Dubai World, which is the government itself, to put some meaning into the word 'support'.

There will be some pain through this process, and indeed for debt holders they too should know that the document they signed for the debt nowhere uses the name of the Dubai government as a guarantor, so now suggesting that there were implied guarantees is wishful thinking. It is another matter that Dubai World can ill afford to 'default' on the debt as the repercussions for Dubai and the UAE, if not the region, will be enormous. Analogies with meltdowns in the past, and references to the 'last days of Rome' are all sensationalist penmanship, and do nothing to provide merit to the discussion in hand. I have always argued that Dubai needs to create some medium term debt to replace the short term nature of its borrowings and this mismatch needs to be adjusted at the earliest.

As Dubai will tone down its 'Las Vegas on Viagra' sentiment and scale back some of its ambitious plans, there will also need to be understanding within the financial community that strangling the chicken does not always mean every one will get a meal as the wolves that tear the chicken sometimes leave nothing for anyone including themselves. The state of the financial press is such that is not even willing to see the broader picture. Dubai is a part of the UAE, and beyond the Federal Reserves held by the Central Bank, there is a huge cache of funds with Abu Dhabi entities who, as I calculate need only to give 100 days if their revenue to pay off all of Dubai's debt! Yes it is not forthcoming like a spigot turned on, because quite frankly it would be too rewarding for bankers who now claim they didn't know what and who they were lending too. If push came to shove, irrespective of the supposed political intrigue, UAE can and will act as one nation.

Some articles have claimed that there is not hope as the total public sector debt of Dubai is equivalent to its GDP. I conceded this was the case as of today indeed, but then the total debt of the US government is 90.4% of its current GDP! Why is this financial press so paranoid about the failure of the US system? In the 30 years I have been here not one bank has ever gone insolvent, and i mean a bank incorporated within the UAE. Yes I have long argued that some projects planned and being executed within Dubai would never really have a decent return on investment and some projects were about ten years before their time. But we must not forget that ten years back when a six lane highway being built between Abu Dhabi and Dubai many thought it was way over the needs of the time. Even today in this recession we see its not really an empty highway.

My point is simple, yes Dubai may not have held up to its much celebrated PR machine status, but then while these problems may well be real, there is a need for balance. Dubai government must bring to the forefront its own faces, not those of expatriates and hired guns to deal with the issues. It must also sincerely and truthfully explain what went wrong and seek substantive discussions about the way forward. The press for its part should remember that sensational stories have an expiry date which is usually one day. Look ahead, educate, explain and suggest the way forward.

The Dubai World saga.

The story of Dubai World and its debt is turning into a soap opera that it really does not deserve to be. Some simple facts are being ignored from all sides, and suggests that we are all either naive or simply hoping that somehow the realities of a debt burdened company will simply change by 'talking' our way out of it. There are some essential media mistakes that indeed Dubai government officials have made and made it all the more difficult to handle then it really was.

The way I see it is that bond holders and lenders always knew that they are lending to a government owned entity without the explicit guarantee of the Government of Dubai. Whether their argument that being a shareholder of Dubai World they didn't need the guarantee to be explicit is really worthy of being tested in a court of law is still to be seen. As a former banker I am clear in that being the sole shareholder of the company doesn't mean you have guaranteed all the debts of the company, even though it may place moral responsibilities on you, strictly from a legal point of view such a guarantee is never explicit unless stated in the debt documents. This the bankers and the bond holders knew when they lent the money, even though they may argue their 'assumption' was that being a Government Related Entity (GRE) the risks of lending were less.

On the flip side of the coin, government officials who are stating that such lending to Dubai World is 'not guaranteed' may well be stating the legal position very accurately, however, they are missing a crucial part of how banks and lenders will see this statement. They will assume therefore that statements in the past three months of support for Dubai World and other GRE's were not meant in the spirit they were and with the current statement of disengaging the debt from being a government obligation, while legally correct, actually limits Dubai's ability to raise debt in the future.

This is where the much admired PR machine of Dubai has totally failed. In the first place what was the need for the 'standstill' statement on November 25th? They should have first had discussions with the bond holders and agreed a 'rollover' or 'extension' and then AFTER an agreement on the matter or otherwise made a statement. Secondly, when all the uproar is going on, why should a government official go on TV and state the obvious 'the government has not guaranteed the debts of Dubai World'. This is known to the bond holders, why say it again?

I am asked often about what I would do in this situation. Well first I am not fully aware of the all the financial matters within Dubai World so I am venturing a guess of a strategy that I believe will work, and perhaps will be excused not knowing the exact asset details that Dubai World. But in essence this is what I would do.

1. Dubai Government to state that yes it is the shareholder of Dubai World and given it is taking a more direct oversight of the current situation it is going to issue a White Paper on the status of Dubai World. It should then commission this study.

2. The Government along with Dubai World management should issue a statement of its total assets and assume they are, as some reports suggested in the past US$75 billion, then state how much of that is impaired with the current global financial situation.

3. Given that a major problem has been the mismatch of funding to the projects it should then offer a new program of debt which would be in chunks of three years, five years and seven years. The longer term debt could be supported by the Government of Dubai, or specific assets, or a combination of both. All short term debt holders then be convinced through a proper dialogue to participate in the longer term restructured debt, and where possible seek support from regional long term fund providers, be they from Abu Dhabi, or Federal Bodies, or even GCC banks.

4. Consider a selective program, stated now as an intent, to take some of the parts of Dubai World public through IPO's and in some cases with the recovery of the world economic situation, to even consider selling them off to repay debt.

5. Create a single platform for communication on the debt issue and related matters to avoid statements from all over the place.

While this all may sound simplistic, but I believe these steps will be better than what is the situation today. Lenders will be happier to have a true dialogue with the stakeholders rather than talking through the press on these matters. I do believe that as confidence is restored through these steps the over all picture will improve exponentially and restore much need confidence back to the system.

Dubai: Deflation path to Recovery

Sitting on the inside, watching the economic crisis is not more a secluded exercise. This economic meltdown is a world wide episode, with ramifications that have not been quite fully understood, especially by the actors who are expected to bring about a change in this scene we stare at. As the global crisis has unfolded its own unique economic tsunami the effects of it have manifest itself in each country in a rather different way. While focus has remained on the United States in terms of the sheer size of its economy, large consumer economies like China and India has been better placed to absorb the tidal waves given that there is a basic level of consumer demand that does need fulfillment.

Dubai has received a great of attention from the world media, and understandably so; during the boom years it was the darling of the media world, and as it is learning, in the down days the same writers who showered accolades are the first ones to throw eggs. This does not mean that the entire negative press is not without foundation, but more like exaggerated to the point of sensationalist fear. For the record yes the recession has hit Dubai hard, and understandably so as it had the most grandiose of plans in the region. The debate rages over the size of its financial commitments and what it will do to revive the economy.

I would say three decades in the region, two of which were in banking, gives me more perspective than a reporter who perhaps would think of a story over a month at best. First of all Dubai has been what I have always called an 'enabling economy', whereby it has created the infrastructure for private sector to thrive. Though, understandably, over the past decade over zealous government officials donned the entrepreneurial hat and goaded the government to become in effect the biggest business conglomerate, having the disadvantage that it pushed the cautious private sector to the sidelines and yet having the advantage that government funding would ensure completion of the grand design. We must remember it was not the real estate sector that caused the problem it was a combination of financial issues within the banking sector and the effects of the global economy that started the downward spiral.

To explain this further one has to appreciate that in middle to late 2008 there was widespread speculation and debate that the UAE will delink the Dihram from the US dollar, a fixed rate that has been unchanged since 1970's. This speculation drove through most of the early part of 2008 substantial funds from Hedge Funds in Europe and elsewhere into the banking system in the UAE expecting a delinking will mean a stronger UAE Dihram. This did not happen and when in September or so last year the UAE Central Bank made its position public that there was no such delinking on the cards, billions of dollars playing this trade and sitting in the banks here too flight. Ofcourse in a sense the hedge funds had their own problems brewing with the sub prime crisis and a stock market that was not entirely comfortable.

The problem would not have been more than that it seems had some fundamental errors not taken place. So lets say $15 billion comes to the banks here, is laying in deposit waiting for the delinking, the delink does not happen the money leaves so no big deal. However, our clever bankers, and I was one of them a decade back, had lent a substantial part of these funds to domestic borrowers, so when the delink did not happen and the funds went back almost every bank was caught with their loan to deposit ratio (which is normally 80-85%) suddenly find they had more loans on their books then deposits to fund them. Well established banks with loads of liquidity were caught with a ration of close to 135% on loans to deposits. Given that international banks were stuck with their own problems even the inter bank market was struggling to fund the banks here.

The timing of all this was smack in the middle of the meltdown happening thus closing the door to the one thing that could have made this crisis less dramatic; the access to liquidity. If the banks had not been so exposed then in a nervous market more monetary moves to increase liquidity in the banking system would have given the buffer to soften the blow. This is what happened in India where huge amounts of liquidity were pumped into the banking system to make sure the consumer did not panic.

This does not mean the real estate crisis would not have happened. I am only arguing that it would not have been so serve and more importantly one has to then question was the rationale for the development model for Dubai wrong? I do not believe the model was wrong, but two things needed adjustment that just did not happen.

1. The size and scale of the development was not tuned into the sustainable demand levels.
2. The role of private sector should have been the bigger chunk of the development cake rather than end up making government owned companies the biggest competitor to the private sector.

I am often asked a question about how long this recession will last and how will Dubai come out of it?

In the first place the recession is a global event and while France, China, India and Germany have shown signs of weathering the storm better, the chances are that towards the fourth quarter of 2009 the financial elements needed for a recovery will be in better shape. This deflation we have seen globally, and in Dubai, was needed for two reasons, one to slow down an over heating economy, and secondly to bring some value back to the process of development. I believe that consumer confidence will stabilize towards the end of this year and net investments will begin to show an increase in the first quarter of next year. Yes this is totally contrary to what some leading bank researchers are saying that we have another 18 months of hardship, but trust me I know that crowd well, they are the same researchers who a year back were predicting some very exuberant predictions.

The way Dubai will come out of this is actually simpler than it looks. While the current funding of Government Bonds of $ 20 billion as a first step forward Dubai has a good collection of companies it can privatize, from airlines to hotels and property companies too. The question is the timing of such privatizations and whether this is the route to take. I believe the enabling element of Dubai's economy means in the region it is the best suited in terms of ease of business and infrastructure to be the place of first choice for regionally based companies. I believe a spending spree in Iraq on account of rebuilding the country will commence early next year, this backed up with a higher oil price will bring stability to the region and a demand led economy will emerge, but gradually. UAE and Dubai are best positioned to take advantage of the support role it will perform and this is where there base of the demand side of the equation will come to the economy.

This does not mean that the government of Dubai should not rethink their role in the economic model. I think they should go towards being more an enabler and privatize some of the business concerns, perhaps with the timing of the first offerings to be in the early part of next year. There should also be a revisit to some of the more grand projects and these should be put on the back burner and bring back the confidence that with some projects shelved the expect financial load will be substantially less. As I said to someone the other day "You can still plan to do all you wanted but just don't do them at the pace you were trying to.'

UAE and the Global Financial Crisis

The financial markets around the world have taken a massive beating, but certainly not the first and certainly not the last. However, as with all such situations of extreme volatility the human mind loses perspective and we begin to forget the context and scope of what exactly is happening. I lived through the Stock Market crash of 1987 and was then trading in the financial markets and saw, one Monday afternoon, everything go red on the screen. It was ofcourse scary to say the least but in months the market had gradually crawled back to not only its former levels but then took off on a barraging bull run through the 1990's. Look at a stock market price chart of the past 30 years and that evening when my heart stopped still is only evidenced by a small jagged little line going down to then rise and leave a small tick mark. I call it the tick mark from the ultimate teacher of financial wisdom; the market itself, which told me I learned something.

I will share what I learned. Crises will come and go; not long ago the Asian Contaignation was seen as the Arrmageddon the financial system as we know it, today people have to stretch their mind to remember what it was. The current crisis is a combination of silly deregulation of the mortgage markets in the US and the abandoned lending of the banks to people who could not afford what they were buying. However, what took the toll was when banks wanted to switch these mortgages into securitized paper (called sub prime paper) and this ofcourse was bought by banks. When accounting rules did not allow this paper to be not marked to market the banks suddenly realized they were holding onto to something that was not that valuable after all. (A dummy version of explaining this). The ensuing concern on the worth of the banks clearly began to hurt their profits and in essence made the world stand up and wonder what was really the true worth if the financial system.

Just prior to the adjustments that took place in the market values, the banking system had been leveraged to around 11 to 12 times the equity base needed to support it. Typically this leverage is around seven times and thus a correction was overdue in any case. Now you will wonder what all this has to do with the UAE market or indeed the GCC market?

Indeed there is some interdependence of financial markets and what happens in New York will have an effect on UAE, Singapore and in small measure to some small Balkan country too. The question is what should be the extent of this impact?

First of all the UAE and GCC banking systems exposure to the sub prime market was negligible in consideration of their size of the domestic banks. In addition none of the local banks were in anyways involved in heavy overseas lending. Yes property markets were a bit over heated and prices has rocketed up and to some extent the argument of supply and demand was being using too often to justify over 100% returns on real estate. Yes there is a strong demand for housing, and my estimate is that this is about 38,000 homes currently needed with an additional 12,000 per year for the next five to seven years. Yes loads of projects have been announced but those nearing completion and fullfiling this demand are few.

Secondly the real estate market had moved up on the back of speculators who chose to put down 3 to 5% on a property and then flipped it to another investor till finally the end user was paying over 40 to 60% more than he could have by buying direct from the developer. So in essence alot of paper profits were being created for middle men who didn't do more than merely be at the right place at the right time with their check book ofcourse.

Thirdly those investors who are serious and hold property for longer than a few weeks or months have the money even today, and for them an opportunity has been created.

What is likely to happen? First I believe people will realize that the market is being talked down more than it should. Second there is no doubt some prices had gone up too much and the greed factor for the developers was too much. These people will have to realize that construction prices have come down and at the same time their is a need to price the projects better and the sales prices too. I foresee developers who will look for say 20% maximum profit and target the end user there is likely to me more joy than headache.

The financial system of the UAE is strong and UAE, especially Abu Dhabi has the firepower to remedy any glitches in the need for money in an instant. Yes the will to do so has to be there, and this is ofcourse going to be tested from time to time. For the moment and based on my experience here it is highly unlikely that UAE will be allowed to have a financial crunch of any sort, not because of the words that can be said but because of the financial resource available to correct things.

I am not suggesting a wild spree of rising prices should occur again but as normalcy has returned to the market, value has been created. Those with strong nerves are more likely to have a better time than those who look at the doom and gloom.

Sher View: Clinton Library Funding

The Washington Post yesterday has raised the issue of foreign, which should imply all foreign sources, but names mostly Middle Eastern sources, and implied there was something sinister about the donations to the former presidents' presidential library. For Senator Obama to also be mentioned that the wishes to bring in strict legislation to donations for such foundations shows that both the Washington Post and Senator Obama are way off the mark. First why question donations from the Middle East only, surely the British and European donors also appear on the list, indeed why not also question US donors too, after all they would have a greater vested interest to use donations for a political cause.

Most importantly, why would someone want to 'bribe or influence' a former President of the US? I can see it being an issue funding a presidential hopeful as being a major issue, (not that US special interest groups don't do that), but why would I pay say $10 million for a lovely library to a man who is no more in office, other than out of goodwill or friendship?

Secondly this is an old issue, as far as I see it dead and buried but brought up by Washington Post perhaps to support the Obama cause, consider the Post seems to like the Obama camp more than anyone else.

Thirdly, instead of celebrating such donations as a triumph of understanding and diplomacy its being looked down up either because the source of funding is not politically convenient or sounds sinister enough for respectable numbers to behave like weekend rags. Come on guys this was not like the Middle East funding some clandestine subversive group within America.

Fourthly, the Middle East donates alot of money to alot of causes, when you produce a daily cash flow of billions and need to only spend a fraction of that money, you do have alot of people lining up for donations. If reporters want to really do their homework then do mention the donations made elsewhere by these same Middle Eastern personalities. I know from personal experience, being an ex banker, that the late Sh Zayed of Abu Dhabi alone funded two major hospitals, one airport, a whole road network system in two towns, and a rural development program in Pakistan that ran into billions. Many will find fault with that, so if he then also gave say a million dollars to an EX presidents library big deal.

Finally, political motives could abound anywhere, the reality is that be fair, name all donors, and suggest the motives from all parties, and don't just bash the Middle East.

I marvel at the ability of the human mind to take something good and twist it into something sinister.

Sher Value: Labor Issues

Over the past week Al Jazeera International has being running a program on the issues of migrant labor and while investigative and issue provoking the recommendations are more implied than clearly stated. Indeed for the GCC countries issues of migrant labor are becoming important and this is an issue that the media, especially in the West seem to be catching on to. This does not suggest that all matters related to labor are fine, but in my opinion, if you are to discuss an issue the please also recommend what can be done to improve things.


I do feel that labor conditions will be a major issue within the realm of the media and various interested parties in the next few months. On the back of this attention there are some who are not making distinction between state sponsored exploitation of migrant workers and the breaking of laws by private companies. I do believe that GCC countries are concerned about labor issues and I know from being here in UAE that this is a matter of concern to the government. Over the years a number of measures have been taken to improve the situation and I understand that in the coming months the scrutiny on labor camps will become more focused.

However, a large number of the abuses start before the migrant worker has even arrived here. Many workers will tell you of the huge amounts of money they pay agents in their home countries prior to them even getting on the plane. In many cases, if not all, the agents are charging the worker for services, i.e. health checks, tickets, approvals and the visa cost, for which the employer in the GCC country has already paid the agent.

Thus the worker arrives into the country to work with a huge debt burden on his head, at times equal to a full years wages. This is perhaps the most pressing stress on his mind and results not only in depression but in many cases an acceptance of some harsh conditions knowing that he has not other option. There are a number of measures that need to be taken by all countries to fix these issues. Here are some of my recommendations:

Create an intra-governmental NGO comprising of GCC countries and countries from where the major work force comes. This NGO will be empowered with bringing about changes in laws on both sides that will help the workers.
Impose punitive fines and punishment on employers and agents who violate the laws, and this should be transparent and without exception.
Enact minimum wage legislation immediately.
Create a special insurance and pension fund for workers to which governments and employers will contribute, with the aim that when the workers retire they have a meaningful financial investment.
Improve the living conditions for workers and make it mandatory for companies to bring care for their workers.

It is important that these measures are enacted immediately and done so in a fully transparent manner. The problem is that the intent of the government is there it just needs to be given more teeth.